In August 2018 the US equity market reached all-time highs, and — despite the correction since — we are still in the longest bull market in American history. If US equities can avoid dropping 20%, the end of the first quarter of 2019 will mark its 10-year anniversary. Similarly, if US economy continues to grow until June 2019, the expansion will hit 10 years, becoming the longest on record. The resilience of the last decade is remarkable, but the question on everyone’s lips remains: when will it end? Thankfully bull markets and economic cycles don’t simply die of old age; there needs to be a catalyst, so read on to see how they stack up against our health check!
Besides investing, we have our sights set on a host of sporting events including the very promising men’s Rugby world cup, which is only nine months away. In a similar fashion to markets the paradigm has shifted slightly, with a strong Ireland team claiming victory over New Zealand during the last autumn internationals, showing they are beatable. England also has the chance to outperform in the FIFA Women’s World Cup during the summer and the men’s Cricket World Cup. As far as British assets are concerned, we think the pound will continue to be volatile but is one of our favourites to outperform expectations (a hard Brexit scenario aside).
8. Billion (almost)
The global population sits at 7.7 billion and is forecast to be at 8 billion by 2023, but growth rates have been declining for decades now. Slower population growth may have contributed to lower inflation in developed economies over the past decade. Technology and the digital age have also been touted as factors. In 2019, the trend could be offset by a move towards populism and tightening labour markets, which might result in higher short-term inflation.
Although President Trump seems to be living his presidency through Twitter, since taking office he has trimmed his daily dose to around seven tweets per day. But that’s still approximately 4683 tweets until the next US presidential election! If Trump hasn’t faced impeachment by then (and there is a roughly 50/50 chance of that happening, if you believe the bookies) he is currently the favourite to win. That said, there’s a chance the US could have entered a recession by the time he runs for re-election, which could spell bad news for Trump fans… more on that later.
General Electric (GE) stock has plummeted around 60% since the start of 2018, the worst performing mega-cap stock this year. GE was once the biggest company in the world. It now ranks around 64th. GE is a good example of why we believe diversification is so important in portfolio management. Our multi-asset funds not only aim to be well diversified at a stock level but also across asset classes, regions and currencies. On the bright side, it’s still better than the 76% loss bitcoin investors have swallowed this year.
5. Flashing red lights
Given the age of this economic cycle, it’s understandable that markets are getting sensitive to potential catalysts for the next downturn. Our economists keep a close eye on this and have developed a broad range of recession indicators. Currently, five out of 20 indicators are flashing red. One of the most important indicators is inflation and it is currently flashing amber. Next, the Senior Loan Officer Opinion Survey is flashing green at the moment, so we feel quite confident that the recession risk for next year remains low, but we see that rising for 2020. For more detail on recession indicators read Tim's blog.
4. Trillion, 4 Hikes?
The US Federal Reserve (Fed) currently has $4.1 trillion on its balance sheet, a figure which has been declining for over a year now. If quantitative easing propped up equity markets and suppressed volatility, perhaps quantitative tightening (QT) will have the reverse effect once it gets going in earnest. Alongside performing QT, the Fed also sets interest rates in the US. We feel there is a stronger probability of more hikes in 2019 than the market suggests. Too many hikes could stifle the US economy; too few may move inflation uncomfortably higher.
3. Months (or more?)
We’ve prepared for multiple Brexit outcomes using a probability tree; pruning it as events evolve. At the moment we think there are four possibilities – a ‘soft Brexit’, a ‘hard Brexit’, a second referendum or an European Economic Area plus ('Norway-style') deal. The daily news flow is dominated by meaningful votes, confidence votes, deals, no deals and backstops. All in all, the British political landscape feels rather scrambled, and managing sterling exposure in this environment will be fundamental.
2. Degrees Celsius
The Paris Agreement was a 2015 pledge to keep global warming to below 2.0 degrees Celsius above pre-industrial times. Here at Legal & General Investment Management (LGIM), we developed our own Climate Impact Pledge a year ago – committing to engage with 84 of the world’s largest companies to improve their strategy. We have already seen many companies taking positive steps. LGIM has been recognised internationally for the management of climate risk in investments, being ranked number two globally by the Asset Owners Disclosure Project.
1. America (1st)?
After much bluster during Trump’s presidential campaign and afterwards, assets in 2018 were hit by trade skirmishes as the president attempted to carve out more isolationist policies for the US. The spat with Mexico and Canada was resolved through a deal, but Trump has escalated conflict with China through a barrage of tariff increases. Will we see peace break out between China and the USA on trade or are we heading into a Thucydides Trap?
That’s all for 2018 folks! Here's wishing you great New Year celebrations and a wonderful start to 2019!