• Market volatility is back and is uncomfortable after a serene 2017. Most portfolios have experienced a negative return as almost all financial assets have delivered a loss for the year.
  • We went from a brief moment of synchronized growth globally in 2017 where the future economic activities are bright to witnessing a global slowdown beginning in 2018. US is an exception due to the pro-cyclical fiscal policy that listed the economy at a 4.2% second quarter real GDP growth rate.  Even with the $2 trillion debt financed growth, the optimum growth in the current economic cycle is behind us.  We are expecting to begin to resynchronize with the rest of the world in decelerating growth.
  • After 9 years of Quantitative Easing and Zero Interest Rate Policy, the Federal Reserve has been on a path of controlled Quantitative Tightening and Interest Rate Normalization. The European Central Bank is conducting its own Quantitative Tightening and many other central banks are conducting Rate Normalization.  All this points to an important regime change from “whatever it takes” unconditional support through massive liquidity injections to draining liquidity as the safety net is gradually removed from the financial system.
  • Decelerating economic growth here and globally means market participants are reassessing future corporate earnings, free cash flow, debt coverage capacity, profit margin, etc. To complicate this is the self-imposed trade disputes by the Trump Administration with all the major trading partners, especially China. Even though a trade dispute through the imposition of tariffs may not meaningfully dent our economy, the secondary factors globally could affect the psyche of corporations and how they invest and make long-term decisions.  One thing everyone agrees on is disdain for uncertainty since a company cannot plan meaningfully in the middle of a storm.
  • As a part of its Rate Normalization process, the FOMC hiked rates 4-times in 2018 and ended the year at 2.25% to 2.50% range. The Committee has also lowered its rate hike estimates from three to two in 2019.  If this is realized, the Fed Funds rate would be in the 2.75% to 3.00% range.  This, we believe, would be deemed the neutral rate or r* for this cycle – the real short-term yield would be 1% above the 2% inflation objective.
  • The fundamentals of the U.S. economy remain sound right now.  We do not expect a recession in 2019, and we expect the stock market to deliver a positive return and at the normal historical average level of volatility.  China and US will reach a face-saving deal for both sides, but the relationship will continue to be challenged.  Beware of the spillover from a possible hard BREXIT and other populism driven political risks.

Please click here to read the completed fourth quarter 2018 commentary.