Take a look at a chart of the stock markets on either side of the Atlantic and you could be forgiven for worrying that 2019 is starting to look a whole lot like 2018. That’s a concern, given what a grim final quarter we endured last year.
The reasons for stock market jitters are in some ways similar but in one crucial regard different.
The similarities surround the economic outlook, which both last year and this is being driven by Donald Trump’s trade war with China (and increasingly with Europe too). From representing a potential threat to growth, trade tensions have now become a real and present danger.
Last week’s manufacturing and service sector purchasing managers’ surveys confirmed that weak sentiment is now showing up in the data too. It is particularly worrying that a manufacturing slowdown, which might be expected in light of the trade spat, is spilling over into the bigger and more important consumer-focused parts of the economy.
Recession may not be the central case, but growth is slowing to a level at which external shocks such as an oil spike could tip us over the edge.
It’s unsurprising that investors are increasingly nervous and markets are experiencing heightened volatility. The fear is that the growth scare could lead to a fourth quarter like 2018’s in which the FTSE 100 fell by 10% and the S&P500 by 14%.
The economic slowdown is not the only concern. The gains in the stock market have been increasingly narrowly-focused this year - that’s often a sign of an approaching top. Company directors are also selling shares at the fastest rate for many years. And the failure of the WeWork IPO recently raised some worrying questions over valuations in the private equity market.
Investors are becoming less willing to give fast-growth but loss-making businesses the benefit of the doubt.
So why are things different this year? Well the big problem in the final three months of 2018 was the coincidence of slowing growth and the continuing desire of the Federal Reserve to normalise its monetary policy. Rates were expected to continue rising into 2019. The Fed was saying as much.
What rescued the market in the first quarter of this year was a change of heart by the US’s central bank. First the mood music changed, then from July interest rates actually started to fall again. Fed chair Jerome Powell described the cuts as a mid-cycle adjustment, but many believe they represented the start of a more substantial easing cycle than that.
So, the key difference between 2019 and 2018 is the fact that economic weakness is being offset by monetary policy stimulus. No-one knows which side in this tug of war will win out but at least there is a two-way pull underway.
It’s not just the Fed that is back in easing mode. In fact, more than half of the world’s central banks cut interest rates in the third quarter. That’s the highest proportion since the financial crisis.
As well as the Fed, the ECB cut rates last month and speculation is rising that both the Bank of Japan and the Bank of England will follow suit in the fourth quarter. Only three countries raised rates between July and September - Norway, Kazakhstan and Argentina. Moving into the final three months of the year, we have already seen cuts from Australia, Iceland and India.
Central bank easing is not a silver bullet for the global economy, of course. In Europe, in particular, there are serious doubts about whether further moves into negative interest rate territory is a good thing. There is a good argument that cutting further simply makes life difficult for savers and reduces the profitability of banks and so their willingness to lend.
But at least we can say that the circumstances that led to the painful market correction a year ago are not the same. History may be rhyming but it is certainly not repeating itself.
Anyway, this is the challenging backdrop to my latest Investment Outlook. I’m putting the final touches to the report this week and we will launch it, as usual, with a live online question and answer session next Tuesday at midday.
As well as all the usual updates on the main asset classes and geographical regions, I’ll be looking at the threat of recession, the chance of inflation returning and the ongoing influence of politics on both sides of the pond.
You can log into the webcast and remind yourself of my thinking three months ago, here.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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