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The January blues

03 January 2019

3 minute read

What spooked the world’s investors so much in December and what does it mean for investors as we look to the year ahead?

Who's this for? Confident investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • What led to the stock market selloff last December.
  • Whether the global economy is overdue for a recession.
  • What we can expect from the global economy in 2019.

Historically, December has been a month for investors to relax and watch contentedly as markets get into the festive spirit. However, the Christmas spirit was notably absent this time around, as equity and wider capital markets rioted to the last.

US stocks endured their worst December since the great depression. Fixed income investors reversed their expectations of further steady interest rate rises in the US, with cuts now expected on a 12-month view . Yet January has seen a calmer mood return, with some of those aforementioned moves being at least partially reversed.

However, the questions remain – what spooked the world’s investors so much in December and what does it mean for investors as we look to the year ahead?

Recession fears

It is perhaps understandable that investors focusing on the chronological age of this economic cycle are getting increasingly twitchy. Measured this way alone, this expansion is positively geriatric. Alongside that, the horrors of the last, unusually severe, recession are still fresh in many investors’ minds. If such harrowing losses can be avoided, who really minds if they are a little early calling the next recession?

This is not a new story in this economic cycle. As we look to 2019, we cannot rule out a recession.  As we regularly point out, the causes of many past global recessions were not predictable ahead of time – oil shocks, wars and more generic swings in ‘animal spirits’ have been an unavoidable part of investing life.

Many argue that part of the compensation we receive from financial assets accounts for these increasingly infrequent blights. Nonetheless, humility about forecasting the markets, and keeping one’s investments adequately diversified, are always appropriate as we regularly argue. The future will remain shrouded in mystery no matter how hard we squint.

For those looking for a more accessible example, think of your ability to know in advance the results of every football game in the Premiership for the weekend just gone. There are generally always a few, sometimes more, surprises.

We may have a better chance however of guessing who might win the Premiership title, based on the quality and size of the squad, spending power, recent track record and a range of other metrics. So it loosely goes with investing. Here, the longer term tends to be more readily tethered to humankind’s ability to innovate.

In the short run, the larger role played by confidence in the world economy will regularly make fools of us all. In such a context, a slant towards stock markets and company ownership within a medium-risk portfolio will continue to play to that long-term theme, giving one exposure to the humankind’s innate restlessness.

Conclusion

Even after the bounce back in sentiment that we have seen so far this year, we suspect that investors are a little too cautious on the prospects for global growth and inflation in the quarters ahead.

We are not expecting a sharp bounce back in economic activity from the world this year. The US fiscal stimulus is expected to wear off this year, and the ongoing government shutdown is further taxing growth. Meanwhile, the Chinese economy should find a lower trend, helpfully a little closer to its potential growth rate.

The clouds continue to darken over the UK a little, but this is of much less importance to the world’s (even the UK’s) capital markets as we regularly point out. Overall, our indicators are still not yet telling us that a recession is on the horizon.

These are our current opinions - but the future, as ever, remains uncertain.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.

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