The first quarter of 2019 offered the antithesis of the last quarter of 2018. Global equities rallied, up over 12%1 in the first three months of the year, while global bonds also posted positive returns2 as interest rates fell. Sentiment is much more positive, but has that much really changed?
Nothing has changed.
On one hand, nothing has changed. While the U.S. administration did not roll out announced tariff increases on goods from China, no agreement has been made on a new trade deal. Trade tensions have eased, largely due to a pause in news coverage and toned-down rhetoric, but tensions are mounting around trade with the United States and Europe, and matters remain unresolved between the United States and China.
Brexit remains in the headlines, and it appears there will be no resolution to the drama until this fall, as the deadline has been extended to October for the U.K. to strike a deal with the European Union (EU).
Global growth is still positive, but it’s slowing. The International Monetary Fund (IMF) recently cut its global growth outlook for the third time in six months, down to 3.3% from its prior 3.5% forecast. In March, China revised its growth forecast to a range of 6.0% to 6.5% from a previous estimate of 6.6%.
Everything is different.
Monetary policy has been the backbone of the global expansion since the crisis. Coordinated efforts by the central bankers of the world in easing credit conditions aided in pulling the global economy out of the ditch. In the first quarter of this year, central banks eased market fears by indicating monetary policy would remain looser for longer. In the U.S., this means that the Federal Reserve does not plan to raise interest rates in 2019, and economists now believe we have come to the end of the rate hike cycle. In Europe, this means that the European Central Bank (ECB) will inject cash so banks can continue to lend and stimulate the economy. The ECB also committed to not raising interest rates in 2019.
In the past, central banks have increased interest rates to stave off inflation, and this reaction has typically choked growth and pushed the economy into a recession. Given that inflation is under control in developed countries, central banks are able to keep rates relatively low. Monetary policy matters.
But there is only so much monetary policy can do. We are certainly toward the end of a long economic business cycle, and there haven’t been any new inventions in economics to completely avoid recessions altogether. An argument also can be made that recessions are somewhat necessary for balancing supply and demand. Understanding where we are in an economic cycle is useful for business owners trying to plan production and pricing, but it is not as useful for the long-term investor.
Nobel Laureate and economist Paul Samuelson once joked that stock markets had predicted nine of the last five American recessions, a statement that underscores the volatility of the markets and their inability to correctly forecast recessions. The follow-up to that, of course, is that economists, as a group, haven’t correctly predicted any recessions.
Given that it’s nearly impossible to accurately time the end and beginning of business cycles and peaks and troughs of markets, the best thing a long-term investor can do is to have a sound financial plan and stick to it. While we don’t know how long this expansion will last, or how long the next recession will endure, we do know the economy and the stock market bounce back from ordinary recessions. We also know that the longer time frame you have to invest, the more risk you can take and the more return you can expect.
Make sure you have a tailored financial plan that addresses your concerns and expectations. Make sure your portfolio matches your risk profile and short- and long-term plans. Reach out to your relationship manager if you have any changes or want to discuss financial priorities. Having an outside perspective is not only useful when forming a plan, it’s also immensely helpful in holding you accountable to your plan through market fluctuations and economic cycles.
1The MSCI World All Cap Index, which captures large, mid, small and micro cap representation across 23 Developed Markets (DM) countries, was up 12.18%.
2The Bloomberg Barclays Global Aggregate Total Return Index was up 2.20%.