Markets - Where do we go from here?

“Economic expansions do not die of old age – I like to say they get murdered” – Ben Bernanke

Variations of the adage “bull markets do not die of old age” have been around for generations but only more recently are getting dusted down, reflecting market observers’ worries concerning the current economic expansion. Economists have difficulty explaining what exactly causes a recession but policy mistakes or missteps, being a kind way of putting it, are usually somewhere in the mix. When one refers to policy, it should be read as interest rate tightening.

Economic data, for the most part, remains resilient, enough that the US Federal Reserve (the Fed) has been on a rate tightening cycle since the end of 2016. However, short term market setbacks or corrections have led many to speculate that policy missteps may be pushing the US and therefore the rest of us to recession. In our view this is overblown and, whilst there is evidence of some slowing, particularly from China, the expansion continues albeit at a slower rate, which is natural for the latter stage of the cycle. The Fed has recently indicated that tightening may be paused.

In our opinion, this latter stage is experiencing additional stress factors in the form of political uncertainty. Examples of this include Brexit and President Trump’s internal and external challenges; the US Government shutdown and trade wars with China. Europe has its own political challenges, ranging from the Italian budget to a weakening French Presidency, with the addition of a slowing German economy. All of these can, and do, weigh heavily on markets and we cannot hide the fact that company sentiment is not as robust as it was. Forecast earnings, particularly for US companies, look uninspiring. 

Equity sell offs are a natural part of market experience, however unwelcome they may be. The sell off encountered in late 2018 was the fourth experienced since the end of the Great Financial Crisis; we do not believe that it is the precursor to the next stock market recession, one more up-leg is likely. At the latter stage of an economic cycle markets become more volatile and active management, as opposed to buying the index or passive investing, becomes even more important (avoiding the real losers and favouring those that gain can lead to attractive outperformance).

We are increasingly asked if we are in the process of changing our asset allocation. The short answer to the question is no, although there have been a few days when we wished otherwise. As asset allocators, seeking a real return for our clients, we are constantly challenging our views, especially as they have not changed for a considerable period, again a characteristic of the latter stage of an economic cycle. So, why have we not changed our view? This is entirely down to a very benign economic backdrop; low unemployment (for most regions), an increase in wage inflation, core inflation being under control and loose monetary policy (US rates are still low by historic standards and are close to peaking) which are all strong positives. 

This benign environment should be reflected through similar markets, although at the latter stage of the cycle markets can easily be spooked and they are being spooked. This recent volatility can be firmly placed at the feet of politicians. Asset allocation is a difficult job at the best of times; but second guessing the outlook for trade wars, populist governments and Brexit is a mug’s game. The risk is increasingly being felt on the downside and expectations of a stock market recession are increasing. As we manage multi-asset real return portfolios; by their very nature they have a high degree of structural defensiveness. The question that will vex us for 2019 is “how much more defensive do we become and when and how we do it”?

Our current strategy is to remain cautiously optimistic for the short term. However, as a strategy, selling equities into further strength is becoming attractive, with the proceeds reinvested into more defensive assets.

James Calder

Head of Investment Research


This document may include forward-looking statements that are based upon our current opinions, expectations and projections. Investment markets and conditions can change rapidly, and as such the views and interpretations expressed should not be taken as statements of fact, nor should they be relied upon when making investment decisions. We undertake no obligation to update or revise any forward-looking statements and actual results could differ materially from those anticipated by any forward-looking statements.

Past performance is not a guide for future performance. The value of your investment can fall, and you may not get back the amount invested

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NICHOLAS COGHILL