9 Jan 2019
Concerns about a worldwide slowdown in growth have made for a rotten time in markets over the past six weeks or so.
During the festive period, low volumes exacerbated some lurching moves up and down as some poor economic data and patchy company reporting really got to investors. Talk of an American recession in 2019 rose to a fever pitch and sent markets tumbling. However, on Friday US nonfarm payrolls delivered a phenomenal 312,000 new jobs in December along with accelerating wage growth. Federal Reserve Chair Jay Powell followed that up by implying the central bank had taken account of market jitters when deciding whether to hike interest rates. A monetary policy pause is now on the cards. This helped global stock markets rebound strongly on Friday, closing up for the first trading week of the year.
We think the worries about a looming recession are overplayed. Our models put the chance at roughly one in four, it’s certainly possible but unlikely. Business investment in the US would have to plummet to create a recessionary environment, yet the return on capital remains greater than its cost. That means it still makes sense to invest in new projects. The US housing market has stumbled somewhat over the past few months as higher mortgage rates put a damper on property prices and existing home sales. But it appears to be a breather rather than a rout.
China is another worry. The nation’s growth has been decelerating for many years now, something you would expect to see as the economy has become one of the world’s largest. It has been trying to balance the need to continue growing fast enough to keep its people and overseas investors happy while also letting the air out of asset bubbles that large amounts of debt keep creating. This is an extremely delicate task, so China’s beef with the US over trade comes at a singularly bad time. This is part of the reason why we think the US and China will come to an agreement soon. It’s in both of their interests to do so – especially if US President Donald Trump wants to win a second term.
After many years of generally lower volatility following the global financial crisis, market deviation picked up noticeably in the second half of 2018. We believe this return to more normal levels is here to stay.
Source: FE Analytics, data sterling total return to 4 January
Stiff upper lips
It’s fair to say that expectations are more muted ahead of the coming company reporting round. This means there could be some happy surprises in the pipeline.
The S&P 500 is expected to report average earnings growth of 11.4% for the fourth quarter, according to FactSet. That’s lower than the past few quarters – and much less than the 20%+ that’s been delivered in the past year – but it would mark the fifth consecutive quarter of double-digit earnings expansion.
In the UK, Brexit rolls on. MPs return to Parliament to debate Prime Minister Theresa May’s compromise deal with the EU. The crunch vote is scheduled for next Tuesday, although it has been delayed before. The government has been pouring money, time and effort into showing it’s serious about bundling the country out of the single market without a deal if MPs vote down Mrs May’s plan. Unfortunately there hasn’t been a whole lot of competence invested in plan B, which sort of undermines it. A multi-million-pound post-Brexit Channel shipping contract was handed to a company with no boats, no docks, no experience and a set of terms and conditions ripped straight from a meals on wheels business. Mrs May is adamant that she can – and will – implement a hard Brexit unilaterally if her deal dies. If actually followed through, we would see a proper constitutional crisis unfold. Of course, the drum continues to beat for a second referendum too, with polls showing that most of those canvassed think the people should have another say.
This hard-edged parliamentary banter hasn’t been taken so well by British manufacturers, most of which rely disproportionately on import/export links. Almost three-quarters of them see Brexit as their single greatest risk, according to a survey by trade body EEF and insurer AIG. More than 80% are worried about what Brexit decisions can do to the exchange rate. Despite that grim cloud, the makers are still generally optimistic about the year ahead: they anticipate larger order books in 2019, both domestically and abroad.
Perhaps, like the rest of us, they’ve decided to get on with things and deal with the drama when it finally arrives – if it ever arrives.