Investor sentiment turned extremely negative at the end of last year as fears of slowing global growth and a policy mistake by the Federal Reserve (Fed) led to a broad equity market sell-off. With fundamentals little changed, I found myself focused on a short but critical list of issues that could influence the market landscape and need to be addressed in 2019 — a “to do" list for the global economy. Clarity on these issues one way or another could impact economic growth, business and investor confidence and ultimately influence the direction of the markets.

In fact, I think the resolution of the items on this list will be the primary driver of market strength or weakness this year. The good news is that we've made some progress on this checklist in January with developments tipping the scale toward a risk-on environment. But in order for equity markets to build on those gains, we need to see positive developments on several of these issues. Let's take a look at this list and analyze how much progress has been made so far.

The Federal Reserve

Things were off to a good start in early January. Fed Chairman Powell eased the market's concern when he confirmed that the Fed would be “sensitive to financial markets" and much more patient when considering future rate hikes. Stocks and bonds both responded positively.

Equities posted their strongest January since 1987. Rates across the maturity spectrum moved lower. The Fed also indicated it would be flexible with its balance sheet reductions, known as quantitative tightening. Powell indicated that the Fed may consider adjusting the pace of its balance-sheet runoff if the current pace interfered with the Fed's goals of full employment and price stability.

The Fed has clearly pivoted and recognized global growth is slowing. They now seem to be communicating that a more moderate pace of rates hikes (or even a pause) is the most appropriate course of action. This is good for the markets and should allow investors to conclude that, unless inflation moves significantly higher, the Fed isn't likely to make a policy mistake that disrupts the markets.

Slowing Growth in China

Worries of an economic slowdown in China are justified. China's economic growth slowed to 6.6% in 2018, its slowest growth rate since 1990. China's manufacturing Purchasing Managers index (PMI) came in at 49.5 for January. Anything under 50.0 signals contraction, and this is the second month in a row that the PMI has come in below that level. Chinese consumers are also showing signs of fatigue, with retail sales expected to weaken to 7.5% in 2019 from around 8.5% last year. While economists could argue that the increased tariffs have minimally impacted the slowdown thus far, an escalation in trade tensions could have lingering effects.

China's government has acknowledged the economic weakness and taken steps to reduce its reserve requirements in an attempt to provide greater liquidity to its economy. Specifically, the Peoples Bank of China implemented a new targeted reserve rate requirement (RRR) with broadened coverage in an effort to support small businesses and make more money available to lend. In addition, they also relaxed lending rules in order to help small businesses obtain funds more easily. These are steps in the right direction. For now, markets seem to be giving these actions the benefit of the doubt. China will need to continue to show recovery in their economic figures to convince world markets that the softness has reversed.

U.S.-China Trade Negotiations

While slowing growth in China may provide the U.S. with more leverage in its trade negotiations, I have always cautioned that the world has typically needed two or more economic engines in order to accommodate global growth. With Europe's recent estimates for growth lowered, additional pressure may be mounting for a U.S.-China trade deal to get done.

Although a deal has not yet been struck, trade talks have made enough progress for President Donald Trump to announce an extension of the March 1 deadline. This means the scheduled increase in tariffs (from 10% to 25%) on $200 billion worth of Chinese goods will be put on hold. The extension of the deadline and an ultimate trade deal could very well extend the relief rally in global risk assets. However, negotiations may prove more challenging in the final stages and any breakdown in talks would likely cause a pullback and added volatility. Still, weaker growth, trade uncertainty and a strong dollar continue to support our underweight to emerging markets equity at this juncture.


The March 29 deadline for the U.K. to leave the European Union (EU) is soon approaching, with U.K. Prime Minister Theresa May not yet able to obtain support for the deal negotiated with EU officials. One of the main sticking points is how both sides will handle the border between Northern Ireland (part of the U.K.) and the Republic of Ireland (part of the EU).

Markets have known about this March 29 date for years, and seem, at least for the time being, to be giving both sides the benefit of the doubt that some deal, or even an extension, will be forthcoming. If May is successful at shoring up support for the negotiated Brexit deal, the U.K. will leave at the end of March with an agreement in place that sets out the terms of its relationship with the EU. In other words, the U.K. would be on track for a so-called “soft" Brexit. Markets do not seem to be pricing in a “hard" Brexit, one in which the U.K. rejects the idea of a close alignment. A hard Brexit would mean leaving both the single market and the customs union, allowing the U.K. to draw up its own rules and customs. If a hard Brexit were to occur, we believe the U.K. would face very difficult economic consequences and that global markets would respond by declining.

Whatever the outcome of Brexit turns out to be, the slowing growth in Europe leaves little margin for error. This is hardly the time for more uncertainty in an area of the world that is having trouble growing at 1%. We remain underweight international equity markets, primarily through an underweight to emerging markets, in large part because of this uncertainty and the slow growth in the region.

Oil Price Stability

Historically, a decline in the price of oil was a net positive for the U.S. economy, as it reduced prices at the gas pump, allowing consumers to spend that money elsewhere. Now that the U.S. is also a large producer of oil, low oil prices also serves as a hindrance to capital expenditures in the industry, slowing economic growth in that industry. Ideally, a price for oil that pleases both sides is best for the economy. We believe that sweet spot is in the range of $50-70 per barrel. At this range, consumers feel they are paying a fair price at the pump and companies can invest in additional projects while receiving a return on their capital.

For the time being, the price of oil seems to be cooperating, hovering near the lower end of the price range. Continued oil price stability is necessary for the U.S. to achieve its economic growth potential.

Expect Volatility While Navigating This List

Slowing growth, positive earnings and contained inflation continue to support our belief that equities will outperform bonds this year. As governments and central banks around the world work to address the items listed here, we believe that their attempts to do so will increase market volatility. As we look around the globe, we continue to believe that the U.S. offers the best combination of economic growth and market prices and thus, favor U.S. stocks in our equity allocation.

Of course, we hope the world is successful in navigating this “to do" list. But rooting is not a strategy. Additionally, markets may have priced in the successful resolution of many of the items on this list, which may lead to disappointment if success proves to be more difficult than expected or is ultimately elusive. Monitoring each of these situations with unemotional rigor and adjusting portfolio allocations appropriately will be our task for 2019.

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