Much has been written about the financial markets of late, but for us, 2018 can be summed up in two words, “Greed & Fear”
The “greed” aspect could be seen clearly in January 2018 as cash continued to pile into the market driving equities to all-time highs. This move came to an abrupt halt at the end of the month when strong US inflation data spooked markets for the first time in almost ten years. At this point, we had our first taste of fear in the markets with a quick 10% fall in the main benchmark indexes.
For those of you that read and remember our weekly update in February, we commented that this sharp move was overdone which proved to be correct when the US markets went on to hit new all-time highs in September. However, the escalating concerns in US/Chinese Trade negotiations coupled with the increased inflationary worries created “the perfect storm” as both equities and bonds sold off in unison. What was most striking about this down movement for both asset classes is they should have an inverse relationship. This culminated in December being the clearest example of “fear” in the markets when “the towel was thrown in” resulting in a 17% fall in the S&P500.
What can we expect this year?
With President Trump at the helm, it ensures making short term market predictions continue to be a very precarious task. That being said I will do my best to outline what we at Fern Wealth will be looking for over the year ahead and how we expect markets to behave.
2019 needs to be a year when the geopolitical challenges of last year can finally be put to bed and the market can then focus on economic and corporate data.
China and the US are once again back around the negotiating table trying to reach a new trade agreement before the 1st of March deadline when tariffs are due to increase. It is in both parties interest to reach an agreement and although we might see further rhetoric from both sides we believe a resolution will eventually be reached. The key consideration here is that both sides must then stick to the agreement!
We saw two distinct themes from economic data last year. The first being unemployment levels continuing to fall on both sides of the Atlantic while at the same time average hourly earnings were increasing. This meant more people were working and salaries were increasing, both good indicators for overall economies. The second theme was weaker manufacturing data as business leaders began to increasingly factor in the chances of an economic slowdown being caused by trade wars.
These factors led investors (& the US President who was by far the most vocal) to be concerned about the pace of interest rate increases the Federal Reserve were introducing. At the time of writing, it now looks like we will only get one interest rate rise during 2019 which is down from four rate increases in 2018. Once factored in this should calm markets and benefit equities.
With few alternative attractive asset classes available we believe that equity markets will provide investors with positive returns over the year but not to the same extent that we saw in 2017. One example to put this into perspective, at the beginning of 2018 the S&P500 was trading at Price/Earning multiples of 18.5 but are now trading at 14, compared to the long term average of 15.2. The same is seen with Global equities which on average are trading at a P/E multiple of 13 well below the long term average of 15.7.
It is difficult to see much clarity when looking at Europe, the strong base Germany and France provided the EU with at the start of 2018 has dissolved with Angela Merkel due to step down in the future and Emanuelle Macron’s initial honeymoon period has come to an end. At the time of writing, we are less than a week away from the UK House of Commons voting on the proposed Brexit deal. It looks very unlikely this will be approved and anything from a second referendum to a hard Brexit could transpire in the aftermath. A week is a long time in politics and we expect constant developments between now and by the time I`ve finished writing this article!
For those clients who have regularly watched my interviews with Bloomberg & CNN or read my weekly notes, you will know that we try not to let ourselves be affected by short term sentiment swings but look at the bigger long term picture. The portfolios that we have created for our clients are designed to help produce returns over the long term rather than be short term trading accounts. Because of that, we are willing to accept negative short term market movements for the greater good of the longer term strategy.
Turning our attention to currencies we are always conscious of the impact of the CHF for our clients. Readers will know my comments regarding the Swiss National Bank and how I have repeated the Chairman`s mantra “the Swiss Franc is overvalued”. As a consequence, we saw the EUR/CHF climb as high as 1.2000 although it subsequently fell back towards the 1.1200 level on the back of previously mentioned global concerns and ChF attraction as a defensive currency. Despite the Swiss Franc strengthen over the year, our long term view remains that it will weaken and ultimately climb towards EUR/CHF1.2600 target.
Our opinion on Sterling changes as quickly as the Brexit politics change. Clients wanting our current view need only pick up the phone and we will offer our insight at that time, but with the landscape changing on a daily basis giving long term projections is a fool`s paradise. With the changes in the expected path of interest rate rises for the US which we outlined earlier in the article, we expect the US Dollar will give up some of the strength it enjoyed last year.
2018 was a year that tested investors confidence and resolve and we at Fern Wealth thank you for the continued trust you have placed in us. We look forward to 2019 being a less volatile and more rewarding year.