The turmoil that rocked markets in October and November has slowed for now, as equities steady and most US indices turned back positive for the year. After fears of a global growth slowdown, an insistent tightening of monetary policy by the Fed, trade woes, and Brexit all abated somewhat, investors began to dip their toes back into risk assets, which had faced selling pressures on all fronts. Many market pundits spoke of an end to central bank support, a profit collapse feared from leaders of the bull market, and ongoing trade concerns accelerating recession odds higher for 2019. A rotation from growth to more defensive value stocks echoed this sentiment, and bond yields declined as investors sought the safety of government debt. Once again coming to the rescue for global equities was Federal Reserve chair Jerome Powell, who on Wednesday indicated they may pull back from their aggressive tightening schedule, with investors now expecting 2 rate hikes in 2019, as opposed to the 4 earlier predicted by Fed officials. Expressing concern that their actions taken thus far would have a lag and needed to be studied, they indicated they would not slam the breaks on the economy just yet. Investors celebrated the continuation of the loose-money environment and global equities surged higher, wiping out a large portion of the recent losses. As one of the two main drivers of current market volatility, investors are now looking to see how their other main concern will play out, namely, trade. With the G20 meeting this weekend, Presidents Donald Trump and Xi Jinping of China will meet to discuss their contentious relationship and the fate of the planned tariff increases set to begin in January. If no deal can be made and tensions flare, markets will surely respond negatively to this most important of relationships. However, if a breakthrough occurs, investors will be thrilled by an indication of a return to normalcy and equities will likely rally significantly.
Looking forward into 2019, trade will continue to be front of mind for most, as there remains many issues to be resolved over the long run between most major economies, and the current US administration continues to move away from the status quo and multilateral negotiations. Economic growth and corporate profitability for 2019 also remains a focus, as figures continue to be revised down, indicating a potential slowdown from this year’s tax-cut fueled growth story is imminent. Adding to concerns are Brexit, with the contentious departure of Britain from the EU proving difficult to navigate, with no deal currently on the table for an easy, stable transition.
Despite all the headwinds, we remain confident that growth globally, while slowing, will remain positive for 2019. The volatility of this year has been unnerving to many after years of seemingly endless gains, but the bull market appears to be intact for now. With the Fed potentially taking a breather, trade risks mostly priced in, and valuations closer to their long-term averages, equities look attractive globally in our view. While volatility will likely be a consistent theme going forward with late-cycle behavior in markets, investors must embrace price swings as opportunities, as active managers attempt to reallocate capital to generate outsized returns. For now, we are primarily maintaining the current allocations, as we feel confident that we are well-positioned for market conditions moving forward, and hope that a Santa rally might be on the way.