Economic expectations have also collapsed. The U.S. is widely predicted to
slow as tailwinds from fiscal spending fade. China is viewed as a victim of
U.S. trade brinksmanship and a rapidly slowing economy. Emerging markets
are seen as vulnerable to a virulent contagion replay of 1998. And Europe
has been left for dead.
But is any of this new? Forecasting doom has defined the genre of
post-crisis literature. The GFC unleashed constant waves of disaster
predictions, crash fantasy and other catastrophe clickbait. The more
harrowing the narrative, the higher the readership. Even Alan Greenspan is
now telling investors to run for cover.
We get it. To be first to spot the outlines of a looming crash can be
glorious (and career-enhancing). But persistently trying to pinpoint the
end assumes there will be a “big one” – that markets are always balancing
on a crumbly ledge between blue skies and calamity.
If only it were that binary and simple.
What if instead, a series of smaller “resets” extended the life of this
cycle? In fact, to date, that has happened. This cycle’s major corrections
coincided with significant economic downturns and adjustments, most notably
the European crisis in 2011-2012, the commodity collapse and U.S. dollar
surge that began in mid-2014 and lasted until early 2016. And now, 2018’s
hot mess (for lack of a better word).
Underpinning these resets has been some key post-crisis “regulators” –
circuit breakers that constrain the overall level of economic growth and
ultimately provide relief. Most crucially, high debt levels around the
world have restricted how much rates can actually rise. Routine
consolidation phases have occurred along the way as interest rate
sensitivity acted to slow economic growth. This past year has been no
Unsurprisingly, central bankers are no longer seen as the maestros they
once were. Instead, timidity has been the dominant characteristic. In the
U.S., the Federal Reserve Bank’s target interest rate has been lifted by a
mere 200 basis points since December 2015. Yet, during the past 10 Fed
tightening cycles, the median tough-to-peak increase in nominal rates has
been a much bolder 500 basis points. Looking into 2019, with the Fed facing
a combination of softening growth and lower inflation, a pause in monetary
tightening looks highly likely.
Commodity prices, which have been highly volatile in the post-crisis
period, have worked similarly. Rising prices negatively impact net global
consumption, investment, and liquidity. In fact, every global recession in
the past 50 years has been preceded by a sharp increase in oil prices.
Conversely, on all recent occasions when the oil price has at least halved,
faster global growth followed. This year has seen a sharp fall in oil
prices, which should contribute to overall higher growth next year.
And then there is valuation. This has become more of a behavioral
regulator. The rules of investor engagement changed after 2008. Whenever
prices surged and perceived values grew too rich, memories and predictions
of another crisis were triggered, restricting overall investor enthusiasm.
What is not well known is that most stock markets outside of the U.S.
remain well below their late-2000s highs in both local currency and U.S.
dollar terms. Deep corrections have plagued the post-crisis path.
Where to next? Looking back, each of these periods provided renewal and
rebirth – breathing life back into a now born-again bull market. This
episode will be no different.
To be sure, there is real risk that end-of-cycle fears become
self-fulfilling and feed into a more serious downturn. Other pressure
points have surfaced too, notably broken leadership of the FANG stocks.
But global macro growth expectations are now the most pessimistic in 10
years, more so than at the major equity bottoms in 2011 and 2016. And while
U.S. economic and earnings growth will slow steadily over the next 12
months, it will be more gradual and modest than most investors fear.
China’s slowdown is already ending in response to easier policy, and the
economy is likely to accelerate back to an above-trend pace. Furthermore,
the euro area’s soft patch is also likely to give way to firmer data, aided
by currency weakness and stronger growth in Asia.
In short, the world is likely to settle back into “muddle through.” What’s
more, given deeply depressed sentiment, a series of “upside surprises” is
highly probable. Long may you run, dear bull market.
*Neil Young’s unplugged version is particularly good:
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in Forstrong’s
Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at firstname.lastname@example.org. Follow
Tyler on Twitter at @TylerMordy
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