Anyone who kept his nerve and bought into the most recent stock-market dip is already ahead again. Now, as has historically occurred during this nine-year-long bull market, such buying opportunities have not only paid off, but have done so in a few months' time. But how many more times will this friendly bull allow brave investors to pat themselves on the back? When do strong nerves turn into hubris? At what point are investors likely to give up on chasing another percentage point or two and become more concerned to lock in profits and cut their risk?
Our view can be summed up briefly: one more good year is possible. The aging bull has not yet run out of legs. We expect the global economy to continue growing for two more years at the same pace as in 2017 – at a lively 3.9%. Only once in the past 50 years has there been a bear market in the absence of a recession – in 1987. The synchronized growth of the global economy is likely to remain a safety net, particularly for equities. However, three years of constant growth could also lead to certain signs of fatigue in stock markets, which crave acceleration and surprise. Consequently, our expectations for overall capital-market returns are not very ambitious.
But markets are unlikely to be as calm and unexciting as this sounds. We anticipate that as the bull gets older and crankier, nasty scares are going to proliferate – for four reasons. First, we expect the four major central banks to overall reduce their balance sheets in the second half of the current year, for the first time since the financial crisis began. Second, many investors have a newish concern: not too little growth but too much. Third, the aggressive protectionist noises from the White House could provoke nasty "accidents" in global trade policy. And fourth, such disturbances could strike when valuations are perched unnervingly high, at the upper end of their historical ranges. If, however, these major hazards are skirted, as we expect, investors are likely to focus primarily on whether, when and to what extent U.S. economic growth may generate rising inflationary pressure, pointing to higher interest rates. But if U.S. rates increase only slightly until cycle end, as we expect, the markets' trend is likely to remain favorable.
Stefan Kreuzkamp, Chief Investment Officer
