Still Expect Volatility in 2019

An extended period of historic calm in equity markets came to a screeching halt in 2018 as volatility resurfaced in most markets. For example, after recording daily declines of 1% or greater only four times in 2017, the Standard & Poor’s 500 Composite Index fell by more than 1% on 32 separate days and more than 3% on five days. Overall, global stocks declined for the first time since 2015, as the MSCI ACWI slid 9.4% in U.S. dollar terms.

As we once again approach record highs, it is tempting to forget the declines from 2018. However, Investors can expect volatility to continue throughout 2019 as the primary trends driving the turbulence last year are likely to persist. Among these are the ongoing trade dispute, rising U.S. interest rates and mounting debt levels.

With regard to global trade, the U.S. and China continue discussions to resolve their ongoing dispute, and markets have risen on rumors of progress. However, investors are mindful that the disagreement could drag on as tariffs continue to disrupt the flow of goods among the U.S., China, Europe and other trade partners.

After raising interest rates four times in 2018, contributing to some of the market turbulence, the U.S. Federal Reserve has recently indicated that it will pause or slow rate hikes in 2019. While this may be heartening to uneasy investors, the Fed continues to sell assets to reduce its balance sheet, contributing to tighter monetary conditions. The tighter conditions, along with uncertainty over how the Fed plans to proceed, could fuel volatility going forward.

Meanwhile, thanks to the historically low rates of recent years, debt levels have escalated as government agencies, consumers and companies have aggressively taken advantage of cheap debt. As debt-service costs rise, borrowers may have to limit their spending.

We continue to believe that remaining appropriately diversified and focusing on fundamentals remains the best approach.

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