Macroscope | The danger in 2019: markets’ dim view of the economy may become a self-fulfilling prophecy
- Hannah Anderson says 2018 was a tough year for investors grappling with market sentiments that were persistently more pessimistic than actual conditions.
- Policy decisions and political tensions will continue to matter in 2019
At the end of a calendar year, it’s natural to take stock of the past year and adjust one’s expectations for the future. At the close of 2018, that process was rather unpleasant for most of us and raised more questions than it answered.
Why was 2018 so tough for risk assets? Does the market know something we don’t about the economy in 2019? And, if the economic outlook is relatively stable, but markets are still moving in a risk-averse direction, is there a point at which deteriorating expectations for fundamentals causes an actual deterioration in fundamentals? Put another way, does perception always eventually become reality?
Between September 28 and December 24, effectively the fourth quarter of the year, the S&P 500 equity index fell by 19.3 per cent, skirting bear market territory on more than one occasion. For the whole year, US equities were only down 4.4 per cent – not much consolation for those experiencing the full breadth of the moves.
US fixed income did not provide much of a cushion to the fall in US equities. Measured by the Bloomberg Barclays US Aggregate index, fixed income gave investors zero per cent in 2018. Corporate credit and emerging market debt were buffeted by the same risk-averse sentiment plaguing equity markets.
There are several potential explanations for the year-end market downturn, which can be surmised as: investors believe 2019 will be a significantly more challenging year for growth, earnings and policy. Investors are probably correct, but slower growth or rising rates are phases that can last a long time, and based on current information, the market may be a bit too pessimistic about the year ahead.