Looking back at 2017, it seems that year was too good to be true. When we look at monthly returns including dividends, the US share market didn’t suffer one negative month.
Unfortunately, that lack of volatility led to complacency, and volatility returned in a big way in 2018. It reached a crescendo at the end of the year, with sharp falls in global shares and a spike in volatility (though Australian shares held up relatively better).
Investors had a lot to be worried about including slowing global growth, the US/China trade war, fears of aggressive rate hikes by the US Federal Reserve, and the US Government shutdown.
Not as bad as thought
Now, however, we’ve seen a good rebound in share markets as investors realised things were not as bad as they thought.
It’s clear markets had become oversold, but there has also been positive news.
The US Federal Reserve, for one, is a lot more ‘dovish’ than many people had thought – it is not going to keep raising rates in the face of slowing global growth and financial market volatility. Instead, it is watching and being patient. That suggests the Fed will pause US interest rate increases for at least the first six months of the year.
There has also been good news in the trade war between the US and China after they agreed to pause tariff increases until March 1 this year.
And the Government shutdown in the US, caused by an impasse between Donald Trump and Congress over the President’s demand for funds to build a US/Mexico wall, isn’t that debilitating for the US economy.
This time around it’s not the whole of the US Government being shut down, it’s only 25%. And many workers in essential areas are still going to work. They just can’t get paid until the shutdown ends. This means the economic impact is quite minor – as long as it doesn’t go on for too long.
What’s the outlook?
So, what’s the outlook going forward?
As always it’s hard to be certain in terms of very short term market direction. We have hopefully seen the lows in the share market sell-off, although this volatility could be with us for a little while longer. Global economic growth globally is still slowing right now.
The good news, however, is that, as we go through the first half of this year, we’re going to see more evidence that central banks are attuned to the risks that investors are worried about.
We’re going to see the Fed pause, we’re going to see the European Central Bank provide more stimulus, and we’re going to see more stimulus coming out of China. And, ultimately, we’ll even see our own central bank, the Reserve Bank of Australia, cut interest rates.
All of those things will give confidence that growth is not going to collapse, and that we’re not going to have a recession.
So, despite some ongoing volatility this year, I think share markets will end 2019 with reasonable returns.
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