2018 didn't so much end with a bang but with a whimper thanks to the drop in global stock markets. As a result, we've seen more than just a few media reports that are filled with words like slow-down, volatility and recession.
It's not the best way to kick off a new year—there are things that we're keeping a close eye on—but there are few key reasons why we remain optimistic about 2019.
Reasons to be optimistic
1) Probability of recession in 2019 is low
The word recession has been mentioned frequently in the last quarter of 2018 but economic indicators tell a different story. Aside from the lagged impact of higher interest rates in North America, most other indicators point to a low probability of a recession this year.
In particular, economic growth, inflation and profitability indicators, all remain positive which bodes well for the year. Credit markets have shown some signs of concerns over growth but credit spreads remain at levels characteristic of positive growth prospects.
2) Global economic growth is expected to remain above potential
We expect global growth to tick along above its long-run potential. This growth will be led by the U.S., especially in the first half of the year thanks to the boost provided by fiscal stimulus—corporate and personal income tax cuts which have boosted investment and consumer spending.
3) Inflation is in check
As my colleague Marija Majdoub explained, inflation concerns appear to be overblown. While inflation has picked up off the very low levels experienced after the financial crisis, current levels are still below pre-crisis readings.
It's the same story for wage growth. Furthermore, unemployment remains at historically low levels.
Continued weakness in oil prices could also contribute to weaker inflation.
4) Weak markets in 2018 create potential for 2019 upside surprise
Despite strong fundamentals, in particular double digit earnings growth, markets were weak and posted negative returns in 2018. This leaves room for a meaningful rally in 2019 if the economy or earnings surprise.
Reasons to be cautious
1) Economic growth and earnings are slowing down
Compared to the extremely high levels achieved in 2017 and 2018, economic growth and earnings are decelerating. U.S. growth is expected to slow down but remain strong and we're closely monitoring the signs of stabilization in the Eurozone and China, after decelerating throughout 2018.
2) Risk of a monetary policy error as the Fed enters neutral policy range
The U.S. economy has reached a delicate balance. Unemployment is historically low and inflation is in check—both reasons for the Fed to pause on interest rate hikes in the early part of 2019. An aggressive Fed could accidentally tip the U.S. economy into recession.
Other banks such as the European Central Bank are looking to move away from emergency level rates (very low, economy-supporting rates) and this too will be a delicate and slow process.
3) Brexit, China and OPEC
Geopolitical events will continue to create uncertainty in 2019. As this uncertainty lingers on, it will weigh on business and market confidence.
What does this mean for you?
Overall, MD is prepared for these economic developments. At this time, we still believe current conditions support equities and that equities should outperform fixed income.
As always, we recommend that you stick to your long-term investment plan which is designed to perform throughout the entire market cycle. Rest assured that we will continue to analyze market conditions and make adjustments when necessary.
If you have any questions about market conditions or about your portfolio, please contact your MD Advisor.
2019 is here. Let's see if it can live up to its potential.