Slower Growth and Market Returns in 2019

Market expectations are low. There's an extraordinary amount of pessimism in the market. I think it's going to take very little positive news on the economic front or the trade front to improve the outlook for equities.

Equity market returns around the world continue to be driven really by three principle fears. The first fear is concern that the U.S. Fed is going to make a policy misstep. In other words, tighten too much into what is a slowing global economy. The second fear that dominated equity markets as we exited 2018 was concern that the US and Chinese trade dispute will continue to escalate, and finally the third fear in the marketplace that has contributed to difficult markets is concern that the economic and corporate profit cycle is mature, slowing down, and the risk of recession is growing looking forward.

Our perspective on those three fears is as follows. First, the risk of Fed policy error in our opinion is overplayed. The Fed is a data-dependent organization. They will adjust policy as the information changes.

On the trade front, we believe trade is probably the single biggest risk as it relates to equity markets in 2019. It's our view that the likelihood of a trade deal is higher than the prospects for a protracted escalation in tariffs in 2019.

And in regards to the third fear, i.e. that economic and corporate profit growth is slowing, that is indeed the case. But importantly, we do not believe the global economy or the corporate profit cycle is going into a downturn. We simply believe that the pace of growth is slowing. In that environment, we think equity returns can continue to be favorable.

I think there's no question there's been somewhat of a disconnect between operating fundamentals and equity performance. The most telling example of that is that valuations around the world have compressed very materially. Corporate profits grew at a relatively robust pace in 2018, and yet equity returns around the world were generally under a lot of pressure. So, stock markets and stock valuations are cheaper today than they were a year ago—and in certain markets like the U.S., materially cheaper than they were a year ago. That's actually a healthy starting point for the market in 2019.