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Is 2019’s market recovery beginning to stutter?

8 February 2019

After one of the worst Decembers for global investors since the Great Depression, followed by the best January since 1987, February has started not too badly for investors. While up overall, the 7th week of the 2019 stock market recovery ended with a little bit of stuttering. This was quickly blamed on Trump and Brexit, which admittedly are easy targets – but so they have been all along.

So, have stock markets finally woken up to the fact that the global economy is really slowing, as can be argued, they had correctly anticipated with their Q4/18 sell-off? Well, not quite. It is far more likely that the recovery has simply run out of steam and enters a consolidation phase. This could last until it becomes more evident that the easing effects of lower yields, less monetary tightening pressures, Chinese stimulus and lower energy prices – that had appeased stock markets over January – are actually taking effect and are manifesting in improving economic data reports.

As we wrote here only last week, a good January doesn’t yet make a good year. Nevertheless, our conviction has increased that the direction of stock markets over the coming months is far more likely to remain positive rather than return to 2018’s negativity. This is mainly for two reasons. Firstly, the less hawkish and in some cases even mildly dovish stance that central banks in the US, the UK and Europe have adopted since the beginning of the year, has reversed the lack of monetary liquidity that characterised the sell-off in the last quarter of 2018. And secondly, business outlook and consumer sentiment levels are far more robust than backward‑looking macro‑economic news flow would suggest. However, in terms of our general upward trend expectation we need to caveat this with a warning that this will be interspersed with the odd but disconcerting episode of downward draft in stock markets.

From a UK perspective this must sound overly optimistic, given the currently never-ending litany of highly depressing political squabbling. Hence my choice of cartoon this week to offer a humorous note to the Irish backstop negotiations impasse with the arrival of the Chinese year of the pig, given it is all but funny. The UK’s central bank, the Bank of England acknowledged this week the effect the Brexit drag has increasingly on 2019 business activity. The resultant decision against another rate rise may be good news for anybody with a flexible rate mortgage, but the reason behind it – stagnating real wage growth – is the opposite.

For UK investors it is important to recognise that while the potential future path of this country may make us fearful or at least undermine our confidence to put our savings to work until all this is resolved, typical investment portfolios’ investments reach far beyond our immediate regional horizon. Furthermore, the vibe we are picking up from our many contacts across business, finance, media and politics is that the most likely outcome is currently seen as some sort of a ‘fudge’ between the government’s proposed deal, an extension of the exit date and a customs union. The scaremongering from all sides must be understood as necessary but unpleasant part of the political process of coercing reluctant parties to agree to some form of compromise.

The relatively stable external value of £-Sterling over recent weeks tells us that the probability of the Armageddon scenarios of inadvertently sliding into a no-deal exit has a much less significant probability than some suggest.

Sad to say we predicted that Brexit negotiations would go to the wire – however, just how close it would get to the set date in the end, even we did not believe possible. In the meantime, it is worth looking beyond our immediate boundaries and realise that the rest of the world is looking far less pessimistically into the near-term future. The strong capital market recovery of the past seven weeks – while Brexit proceedings deteriorated from bad to worse – should be considered as evidence for this view.