With just three weeks to go, 2018’s market contrarians are proving prescient.
The outlook was decidedly bullish for U.S. stocks and developing-nation assets 12 months ago, with both forecast to build upon a stellar 2017. The beaten-down greenback wasn’t expected to fare any better in 2018, as a rosy international growth outlook threatened to lure investors away from American markets. And despite some tough talk between the U.S. and China, risks of an all-out trade war were an afterthought.
Not much has gone according to plan, but DWS, Cantor Fitzgerald and Morgan Stanley were among the few who bet against the trend and got it right. Federal Reserve rate hikes against a backdrop of sharply escalating trade tensions roiled markets in 2018, punishing U.S. stocks and causing risk-averse investors to flee developing nations. Meanwhile, the down-and-out dollar has gained against virtually all major currencies amid rising rates and buoyant U.S. growth.
Here’s what those who called 2018 correctly expect in the new year:
Stalling Dollar
Stefanie Holtze-Jen, chief currency strategist at asset manager DWS, is among the vindicated.
In February, after the dollar’s worst annual slide in 14 years, she called for the greenback to strengthen to $1.15 per euro by March 2019, from the prevailing level of about $1.23. The argument that the U.S.’s twin deficits would depress the dollar was over-hyped, according to Holtze-Jen, who saw extreme bearish positioning setting up a rebound.
The dollar’s rally starting in mid-April proved her right -- inflicting pain on global investors. But Holtze-Jen doesn’t expect another strong year for the greenback. She sees the euro ending next year at $1.15 as slowing growth and European political woes weigh on the common currency, while the Fed approaches the end of its hiking cycle. Expectations for Fed rate increases have crumbled, with markets now pricing in less than a quarter-point of tightening in 2019.
Most forecasters expect the euro-dollar pair to reach $1.20 by the end of 2019, according to a Bloomberg survey, from about $1.14 now.
“The Fed has come back from autopilot,” said Holtze-Jen. “Their calls will be more data-dependent. That’s something that takes the needle lower on the dollar going forward.”