As this cycle is getting closer to breaking records due to its longevity, talks of a recession intensify, despite a missing fuse to trigger it. Interest rates still occupy the top spot among investors’ concerns, even with the Federal Reserve’s decision to pause hikes amid rising volatility. All indicators that might provide a clue on what is to come are being monitored for the slightest fluctuation, as investors are looking at the calmer waters of international trade affairs to support a more positive approach on business in the year ahead. All these premises support the theory that this year will be a good one for overall economic growth, close to the levels in 2018. Major markets continue to thrive, fueled by population and employment growth, as the growing wave of tech employers is gaining more strength.
Mark Heppenstall, CIO of Penn Mutual Asset Management, believes that negative investor sentiment in the last quarter of 2018 prepared investors for the economic slowdown ahead, minimizing risks and maximizing returns. In the interview below, Heppenstall shares his views on the evolution of capital markets in 2019.
This year seems to be crucial for how this very long cycle will close. What are your predictions for 2019 when it comes to capital markets?
Heppenstall: The current economic expansion in the U.S. is on track to become the longest on record by mid-year. We expect gradual recovery of equity and credit markets this year as the current Fed tightening cycle comes to an end. A moderation in economic growth and inflation back into the Fed’s “comfort zone” will help extend the current extended cycle.
Name the main factors that will impact financial products in the months ahead. Which one is essential for the stability of the markets?
Heppenstall: The recent market volatility has been driven by a number of factors—i.e. China trade tensions, political turmoil in D.C.—but Federal Reserve policy has been the primary source. The sell-off in risk assets started in early October when Federal Reserve Chair Jerome Powell indicated that numerous more rate hikes were in store for investors and then turned 180 degrees in January when Fed communication and forward guidance turned “dovish,” indicating a pause in Fed tightening.
2018 was one of the worst years for the stock market. Should we expect more of the same in 2019?
Heppenstall: We expect stable interest rates and attractive valuations will lead to a recovery in equity valuations this year. The negative investor sentiment during the fourth quarter of 2018 lowered investor expectations for both economic growth and corporate profits in 2019 and will help generate positive equity market returns.
How will damaged investor sentiment impact the financial markets going forward?
Heppenstall: Investor fear escalated during the fourth quarter driven by concerns that an overly aggressive Fed could tip the U.S. economy into recession. Sentiment rebounded almost immediately after Fed Chair Powell changed his views regarding the path of monetary policy.
What would you advise investors that are still formalating their strategy for 2019?
Heppenstall: The benefits of diversification were limited last year as stocks and bonds both struggled. More recent market behavior suggests a return of high-quality bonds acting as good hedge against “risk-off” environments.
Image courtesy of Penn Mutual Asset Management