It is not easy to turn 2018, and especially the fourth quarter, into something positive from an investor's point of view. They set a number of records – negative ones. The S&P 500 experienced its worst fourth quarter since the financial crisis and its worst December since the Great Depression. For the first time in several decades, both equities and bonds posted negative annual returns globally over a calendar year. And 90% of the asset classes closed 2018 down on the year (in U.S. dollar terms) – a higher percentage than ever before. Those who, like us, continue to expect that 2019 will be a positive year on the whole, rather than being discouraged by 2018's devastating annual balance sheet, can certainly promise one thing: much more favorable entry prices and thus higher yieldpotential for the coming twelve months. Our positive forecast also certainly requires a good deal of courage as the number of Cassandras correlates strongly with the size of price losses. And, of course, it won't be possible to say with any certainty what drove this brutal year-end until a few months from now. Was it a temporary setback after previous over-optimism, with market technicals being a factor? A longer-term revaluation of risks in the wake of weaker macro data? Or anticipation of a recession (or at least a profit recession) and thus possibly the beginning of a real bear market?
Similar questions arose at the beginning of 2016 and, in addition to the sharp price losses, other parallels quickly emerge, such as the revisions made to global growth and profit forecasts and the fall in oil prices. Another parallel is the gloomy feeling many investors have had at every stock price swoon in recent years. It is true that growth in China, the change in monetary policy in the developed world from quantitative easing (QE) to quantitative tightening (QT), and, most recently, the China-U.S. trade dispute are all potential sources of a major slump. The U.S. Federal Reserve (Fed), meanwhile, showed on December 19 that monetary policy also still has leverage on the markets. Although the interest-rate rise was expected, and the Fed reduced its number of expected rate rises in 2019 from three to two, and stressed even these increases would be data dependent, markets reacted very sourly. This despite the fact that employment in the United States is at a record high and real interest rates (allowing for inflation) are only around 1%. This suggests that investors are less concerned about the Fed's influence on the real economy than on capital markets – especially, perhaps, when the Fed is reminding investors that it will continue to shrink its balance sheet by 50 billion U.S. dollars a month by not replacing bonds it bought as part of QE as they mature. And as the goal, and the result, of all the unorthodox ultra-loose monetary policy since the financial crisis was to generate asset-price inflation, it is understandable there is concern that reversing the policy could provoke asset-price deflation. The extent to which the interaction of monetary policy, the economy and financial markets might then generate a negative downward trend is likely to continue to preoccupy investors for some time to come.
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