2018 was a difficult year—a rollercoaster of highs and lows capped off by the second-worst December on recor.[i] Global equities declined -3.0% last year.[ii] Yet, looking forward (as markets do), evidence we will show you overwhelmingly argues against bearishness now, in our view. Global equities’ 8.9% jump off Christmas Eve’s low through January’s end now looks like a classic V-shaped rebound typical of market recoveries.[iii] We think it is only the beginning of a brighter 2019—with December proving the adage it is always darkest before dawn.
Consider the backdrop using America’s S&P 500 denominated in US dollars, which has a much longer published record than the MSCI World or FTSE All-Share. Following all corrections (sharp, sentiment-driven drops of around -10% to -20%), returns in the 12 months after the bottom averaged 34% before dividends.[iv] Such moves aren’t uniformly positive—they bring volatility with them, and a renewed or additional correction is always possible.
That said, late-2018’s pullback appears to be a correction that ended on Christmas Eve. Assuming so, it will have ended closer to calendar yearend than any preceding S&P 500 correction or bear market. That means timing-wise calendar-year 2019 will align very closely to the 12 months off a correction low. Therefore, simply achieving average post-correction 12-month returns—plus a little to include dividends—would imply an outstanding year ahead. Whilst averages aren’t predictive, this image is illustrative, in our view. Outside global recessions and world wars, equity markets have never fallen two years in a row.[v] The vast majority of economic indicators suggest a global recession isn’t looming. Pockets of weakness exist—always do. But most of the world is doing well, in our view.
Returns since Christmas Eve’s low appear to be the V-shaped correction’s right side. We anticipate more gains ahead, although the path could be jagged, moving more slowly now.
Politics should also be a tailwind for equity markets in 2019, with this being year three in President Trump’s first term—hugely the four-year US presidential cycle’s best. In US dollars, US shares in third years average 17.8% since 1925 and haven’t been negative since World War II’s 1939 onset—and even then down only -0.9%.[vi] We think that positivity stems from political gridlock, which November’s legislative elections extended. Gridlock also reigns globally, with most European governments either minority administrations or weak coalitions unlikely to do much.
The major political question mark—Brexit—should sunset soon, delivering investors much-needed clarity whatever the outcome. Whilst myriad possible outcomes exist as we type, provided Brexit doesn’t get delayed beyond 29 March, investors will soon know whether they are dealing with a soft, hard or no-deal Brexit (in which Britain leaves the EU with no transition period and trade deal). Even the latter scenario shouldn’t be the abject disaster many fear, in our view, as businesses have spent more than two years planning for the possibility. Trade would revert to World Trade Organization (WTO) terms, which are hardly onerous, likely creating plenty of positive surprise potential.
We think economic fundamentals are also better than most suspect. Notwithstanding occasional short-term volatility, Leading Economic Indexes (LEIs) for the US and eurozone remain in long uptrends—high and rising.[vii] Recessions usually don’t begin until LEIs have fallen for several months. China’s government has launched a large stimulus program—seemingly underappreciated by many—which so far seems to be keeping the long-dreaded hard landing at bay. Britain’s continued gross domestic product (GDP, a government-produced estimate of national economic output) growth keeps defying Brexit dread. Very few nations of significance have experienced contracting GDP recently (there are almost always some). Even those appear to be minor—stemming from one-off, temporary situations.
Little noticed amidst the gloom, equity valuations like price-to-earnings ratios (which divide share price by corporate profits) contracted last year as equity markets fell whilst corporate earnings soared. We think there is only one aspect related to valuations that helps with timing markets: When valuations contract one year, they usually expand the next—even if there is a recession.[viii] With MSCI World earnings projected to grow this year, according to estimates tallied by FactSet, a data provider—and since earnings regularly top analysts’ consensus estimates—expanding valuations plus strong earnings implies share price increases.[ix]
Volatility is a two-way street. We got the bad kind in Q4. We are riding the good kind so far in 2019. The unpleasant can always return, as another correction is possible, for any or no reason. But overall, we forecast 2019 to be the payoff for discipline and patience in 2018.
Investing in equity markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. The value of your investments may fluctuate. International currency fluctuations may result in a higher or lower investment return. Past performance is never a guarantee of future returns.
This document constitutes the general views of Fisher Investments UK and Fisher Investments, and should not be regarded as personalised investment or tax advice or as a representation of their performance or that of their clients. No assurances are made that they will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts may be, as accurate as any contained herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited Headquarters: 2nd Floor, 6-10 Whitfield Street, London, W1T 2RE, United Kingdom. Fisher Investments Europe Limited’s parent company, Fisher Asset Management, LLC, trading under the name Fisher Investments, is established in the USA and regulated by the US Securities and Exchange Commission. Investment management services are provided by Fisher Investments.
1 Source: FactSet, as of 3/1/2018. MSCI World Index return with net dividends, 31/12/2016 – 31/12/2017.
2 Source: FactSet, as of 3/1/2018. Based on MSCI World Index calendar-year returns with net dividends.
3 Source: Global Financial Data, Inc. and FactSet, as of 28/12/2017. Annualised price returns in USD for bull markets from 1926 to 2007. The current is omitted as it is incomplete. GFD World Index used for bull markets from 1926 – 1970; MSCI World Index from 1970 – 2007. The MSCI World Index’s 2017 price return in USD was 20.1%. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
4 Source: FactSet, as of 3/1/2018. MSCI World Index return with net dividends in EUR, 31/12/2016 – 31/12/2017.