Here is a link to the full report.
Here is a section from it:
% probability the asset cycle stays in ‘expansion mode’ in 2019 Our deep dive into business cycle history and its phase transitions shows that 2019 likely stays in the expansion phase. Empirically, the cycle sets a constructive base case for key assets: high-single-digit returns for DM and EM equities, a rebound in EUR/USD, and a rise in US interest rates with the curve flattening, both by less than in 2018. A maturing cycle widens US credit spreads, helps commodities and keeps gold stable.
But four challenges raise the risk profile Fundamentals that made us argue “there is room to grow” in 2018 are still present (flatter Phillips curves, easy financial conditions & dormant imbalances). Yet, four macro shifts raise risks: a) slower US growth; b) core inflation convergence; c) broader G4 policy normalisation; and d) China easing amid larger FX risks (per our Econ views).
What could take us to the end of the asset cycle? A transition to the final stage of the cycle involves a negative skew for risky assets (equities, credit & EM) and large moves in curves and the USD. In our framework: a) an increase in Fed Funds north of 125bp; b) a 2% inflation acceleration; c) a sustained 10% drop in equities; d) a 2% rise in credit growth above trend; or e) a 0.75%-of-GDP rise in the US CA deficit, raise the likelihood of an inauspicious 2019 cyclical transition.
Slower US growth unlikely to bring equities down, but likely to drive vol up Experience from past cycles shows that stocks tend to deliver gains as long as the economy continues to expand above capacity. The price to pay at this stage of the cycle is a pickup in average levels of volatility, our analysis shows. 2019 global earnings growth is likely to slow and the MSCI ACWI to deliver single-digit returns.
The big question at The Chart Seminar this week was whether the condition that has developed on the stock market in 2018 is a medium-term correction in a secular bull market or whether this is the end of the bull market that began in 2009 on Wall Street.
The answer is that we are, in all likelihood still, in a secular bull market. However, the 9-year trend within that secular advance has lost momentum and is therefore still in a medium-term correction.
The question that logically arises is how much of a drawdown should one be willing to accept in order to stay invested for the long-term but to also ensure that cash is on hand to make opportune purchases when the conditions are right?
One of the topics we discuss at The Chart Seminar is targets are for the birds. No one knows how far the market is going to rise or fall and to come up with an estimate is the equivalent of telling the market what to do. The problem is it doesn’t listen.
What we can do is to tailor our tactics to the reality provided by the market. A loss of momentum following a particularly consistent trend is not bullish. It suggests that we are gong to see more volatility and that is what we are now seeing.
One of the most important considerations is that despite the loss of uptrend consistency now present the kinds of things we look at for signs of future recessions are not present. However, that does not mean they are not present elsewhere. Global growth has been very patchy and monetary conditions have been tightening up, globally. Therefore, it would be incorrect to second guess the price action, while also in the full knowledge that the underperformance of Wall Street may be as the result of contagion from other markets, not least China and the EU.
This is a market where what’s weak is weak and what’s still firm is firm. There is a clear delineation where the semiconductors sector has been leading on the downside along with midcaps and banks which suggest interest rate sensitivity. Meanwhile dividend growth companies such as telecoms, big pharmaceuticals and consumer staples are exhibiting clear relative strength. That rotation is contributing to an uptick of volatility on Wall Street but a sustained breakdown from current ranges would be required to signal more than rotation.Back to top