To Our Valued Clients,
In 2018, volatility returned to global markets after historic calm in 2017. The S&P 500 Index moved by more than 1% in nine different trading sessions during December alone, compared to eight total times in the entire 2017 calendar year. The index had a total of 64 of these trading days in 2018. The economic trajectories of major global economies diverged in 2018 with US growth continuing at a strong pace and non-US growth decelerating. After the passage of a $1.5 trillion tax cut in the United States, the Federal Reserve Open Market Committee took a more hawkish stance and steadily hiked rates, contributing to an appreciating US dollar and stirring fears of an overly-aggressive approach. Maybe most notably in 2018, President Donald Trump’s administration engaged in trade disputes and proceeded to implement tariffs on approximately $300 billion of imports, primarily from China. China responded to these protectionist policies with retaliatory measures.
Regardless, the US economy continues to demonstrate its resilience. With unemployment at its lowest level in 49 years, wage growth has increased along with consumer spending and industrial production. These conditions suggest further US economic growth in 2019, however, we expect volatility to continue, driven largely by tighter Federal Reserve monetary policy, trade tensions and rising debt.
In 2019, we see global growth moderating as the US economy enters a late-cycle phase. Slowing growth and the impact of tariffs make for a more cautious corporate outlook as earnings may moderate. The risk of further protectionist trade policies continue to be at the front of our minds in 2019 as the US has already imposed tariffs on 12% of imported goods, and many trade partners retaliated. A sustained move toward protectionist policies could derail economic growth and hit corporate earnings as re-orienting global supply chains can be difficult and costly.
Moving to Europe, economic growth has been relatively weak in the Eurozone with political risks dominating the headlines. The United Kingdom Brexit negotiations are still struggling to gain traction and many observers say that Theresa May’s future as Prime Minister hangs in the balance. These tensions continue to be a source of volatility abroad. Additionally, a budget showdown looms between Italy’s new government and the European Commission which could add to geopolitical tensions and has already resulted in a downgrade to the country’s debt rating by Moody’s. Finally, we will be closely watching the transition of leadership at the European Central Bank as current ECB President Mario Draghi’s term comes to an end in October. This will likely be a delicate transition as the ECB is simultaneously winding down its stimulus programs.
As we look to 2019, we see a few themes to watch: divergence, disruption and debt. Over the past couple of years we have seen an increase in divergence in growth among developed economies around the globe. We believe such divergence is likely to continue, but may be moderated by US consumption and investment. We also see the potential for disruption in multiple areas: monetary policy disruption and geopolitical disruption. The US Federal Reserve is likely to continue on its path of gradual interest rate hikes barring a major downturn in economic data or a severe correction in asset prices. The Fed is simultaneously engaging in balance sheet normalization, 10 years after its unprecedented policy maneuvers as a result of the financial crisis. Additionally, as mentioned earlier, the European Central Bank is due to begin winding down its own quantitative easing program in 2019 along with a new President to be nominated later in the year. Geopolitical disruption, while always a risk, is something we will closely be watching in 2019 as changes may sweep across Europe and trade conflict continues, primarily between the US and China. The final key theme for 2019 may be global indebtedness. This problem is widespread, affecting households, companies and countries alike, and becomes more burdensome as global rates rise. In addition to short-term debt effects, long term effects include concerns that additional money being spent on debt servicing may mean less spent on global consumption and investment, leading to slower global growth.
The market outlook for 2019 may be a bit murkier than in years past. We remain cautiously constructive on risk assets but see several issues potentially contributing to continued volatility including monetary policy, trade tensions and growing debt levels. As always, we stress diversification, prudent investment selection and emotional intelligence. Mitigating against downside risk will be critical during rising volatility, this includes being well-diversified within equities and fixed income, taking opportunities to upgrade the quality of positions with a focus on valuation and strong fundamentals.
As we head into the first quarter of 2019, we wish you and your families a happy and prosperous season. We thank you for your ongoing trust and confidence, and hope we can continue to help you discover The Next Piece – to Your Peace of Mind. ™
Josh Williford, MSF
Director, Empowered Investor
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