Grim outlook

An eventful year for the global economy is coming to an end, let’s paint a picture of the events that shaped the year and the year ahead. 2018 has been a disappointing year for most investors. Almost all markets, both stocks and bonds, have fallen in value this year, under pressure from rising interest rates, political developments such as Brexit, and the trade dispute between the U.S. and China.

It is easy to be influenced by the pessimism now affecting markets. Sure, there is likely be more bad news in 2019 other than Brexit and trade disputes, with the potential to damage economic growth around the world. But there are signs that market returns may be more positive in 2019. Greater realism has arrived with falls in stock markets, particularly since September. Markets are pricing in at least some of the risks we have identified.

Nearly all the economists of respected banks and investment houses expect that a gradual slowdown in growth in the U.S. in 2019 and 2020. The emphasis is on the word gradual: we do not see a recession as likely in 2019 (although not inconceivable in 2020) as many of the forces that led to a strong year in the U.S. in 2018 are still in play. The slowdown, however, means that an end to the cycle of rising interest rates is in sight.

Weaker growth in the U.S. is also likely to lead to the U.S. dollar losing ground against other currencies. This is good news for emerging stock and bond markets as a strong dollar sucks money away from these markets. Emerging markets, including China, have suffered particularly badly in 2018 and they may recover in 2019.

Regarding bond markets, the outlook looks no better than grim, with the central banks, who have been huge buyers of government and other bonds, steadily departing the field. Corporate bonds, however, have become cheaper in recent months and, if the slowdown is limited in the U.S. next year, will be supported by strong fundamentals.

Also, 2018 was the year in which the long-term sustainability of business models started to influence how the market prices companies. Notably, investors criticized (and punished) the practices of large technology companies leading to falls in their stock prices and increasing physical damage caused by climate change; inequality between generations has led to political turmoil in several European countries.