Few investors will look back on 2018 with kindness as a cocktail of slowing growth, trade tensions and tightening liquidity pushed most asset classes into negative territory. The final quarter, however, was the real sting in the tail as US markets plunged, driven on by fears of a recession stoked by wide scale selling causing the S&P 500 to briefly enter into a bear market (a fall of more than 20%). So, what caused this sell-off and is it justified?
The first factor was slowing growth led by China, which disappointed investors who perhaps had become too optimistic following a stronger 2017.
Secondly, trade tensions escalated between China and the US culminating in wide scale tariffs being imposed on goods entering into both countries.
Thirdly, US interest rates rose four times during 2018 and other central banks signalled intentions to reduce credit, leading to tighter liquidity conditions.
These issues combined to cause real concerns of a wider scale downturn in 2019.
In the period since the beginning of the year however, things have completely changed direction with many markets having made strong gains, so why has this happened?
Firstly, China announced a series of measures to stimulate its economy.
Secondly, the Federal Reserve in the US suggested a slowdown in the pace of rate rises.
Thirdly, trade talks between China and the US appear to be progressing towards at least a truce.
Investors’ nerves have calmed and markets have rebounded from a very oversold position.
This is always the difficult part and there remains a number of uncertainties which cloud the picture.
It appears likely that the global economy will slow over the first half of 2019 as the benefits of tax cuts in the US begin to fade.
The geo-political picture remains uncertain with populist parties gaining support, particularly in Europe.
In Britain the Brexit conundrum remains unresolved despite passing the original deadline in late March, however the agreement of an extension is not necessarily good news. The long period of inertia has damaged the level of investment by business and will ultimately slow economic growth. Politicians appear to have finally woken up to the urgency of the situation and although we remain optimistic that a resolution can be found, the ultimate make up remains elusive.
Whilst data continues to offer conflicting evidence and uncertainties have increased, a more supportive stance from central banks and Chinese stimulus measures leads us to believe that the slowdown in growth won’t metamorphosis into a wider scale recession. That said, we remain vigilant with a bias to assets which offer some defensive qualities.