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Blog Posts — January 4, 2019

2019 Market Outlook I – Dampened Spirits

Equity investors hoping to recoup last year’s losses may be in for a long wait, if annual forecasts from strategists – already jarred by December’s market sell-off – are anything to go by.

The average forecast from ten strategists compiled by Bloomberg1 see the STOXX® Europe 600 Index rising 6.9% to 3612 in 2019. That compares with a 10.8% retreat for the pan-European benchmark last year, its first annual loss since 2008.3 For 2018, they had predicted gains of 11%.

Yet such calls have been jolted by last month’s severe market pullback, which pushed the STOXX® Global 1800 Index to its worst December on record4 and the Eurozone’s EURO STOXX 50® Index to a bear market. When the Bloomberg forecast was compiled on Dec. 17, the 361 index-level prediction for the STOXX 600 implied a gain of less than 1% for 2019.

The EURO STOXX 50 Index declined 12% in 2018. Both it and the STOXX 600 ended the year at a two-year low.

The new year “could be dominated – and hampered – by several uncertainty factors, from economic and earnings growth concerns to a negative political backdrop,” UniCredit strategists wrote in a presentation.5 “We expect a fairly shaky market environment with consistently higher implied volatilities.”

From rally to multi-year loss

The average strategist in a Bloomberg survey on Dec. 1 forecast an 11% increase in US stocks in 2019.6 After December’s market performance, the predicted year-end index level would now imply a 22% gain – twice as much – for the year ahead. The STOXX® USA 900 Index dropped 5.6% in 2018, also a first annual loss since 2008, erasing a gain of as much as 10.6% through September.

Markets slumped in 2018 amid concern that rising US bond yields and a trade confrontation between Washington and Beijing would stymie the global expansion. In December, US President Trump tweeted that he was a “tariff man,” and later criticized the Federal Reserve’s rate hikes, both adding to investors’ unease about policy. Europe’s economic picture didn’t help: data throughout the year showed that an acceleration in activity in 2017 lost steam last year, while the UK’s Brexit process and Italy’s budget deficit further muddled the outlook.

Stock losses intensified after the Fed raised rates on Dec. 19 for the fourth time in 2018.

Global slowdown

As they position their strategies for a new year, brokers and asset managers can gauge the fundamentals of the global economy and of the corporate world with a bit more clarity than they would have in trying to foresee the performance of a volatile equity market.

Their starting point is a near-consensus call that the US economy has peaked for the current cycle. Bank of America (BofA) Merrill Lynch and Wells Fargo expect US growth of 2.7% in 2019,7,8 from around 3% in 2018. BNP Paribas is less bullish, forecasting growth of 2.1% amid weaker international trade, and tighter monetary and financial conditions.9

Goldman Sachs estimates the Eurozone’s growth will slow to 1.6% in 2019 from 1.9% last year as the economy loses momentum and financial constraints hurt activity in Italy.10

Finally, Nomura expects the annual pace of gross domestic product growth in China to fall below 6% by the second quarter of 2019, before monetary stimulus, deregulation and tax cuts help the economy reaccelerate later in the year.11

The global deceleration will be reflected in corporate profits. BofA Merrill Lynch sees global earnings slowing down to an annual growth rate of less than 5%, from more than 15% in 2018.12

Key to financial markets’ performance in 2019 will be the Fed’s approach on monetary policy. Fed Chairman Jerome Powell said in December policymakers see two more interest rate hikes in 2019. Given the market’s negative reaction to the December hike, the central bank may be prompted to pause monetary tightening, according to German bank Deka.13

This article continues in a second part with an outlook for currencies, volatility and investment styles.

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Bloomberg, ‘Strategist Forecasts for European Stock Indexes in 2019 (Table),’ Dec. 17, 2018.
Price return in euros. 
Total returns in euros after dividends.
Total returns in dollars after dividends. 
UniCredit, ‘The UniCredit Macro & Markets 2019-20 Outlook,’ Nov. 15, 2018. 
Lu Wang, ‘Strategists Expect Stellar 2019 for U.S. Stocks,’ Bloomberg, Dec. 1, 2018. 
Bank of America Merrill Lynch, ‘2019 Year Ahead Outlook,’ Dec. 4, 2018.
Wells Fargo Investment Institute, ‘2019 Outlook,’ December 2018.
BNP Paribas Economic Research Department, Ecoweek, Dec. 21, 2018. 
10 Goldman Sachs Research, European Economics Analyst, Nov. 15, 2018.  
11 Nomura, ‘China outlook 2019: after winter comes spring,’ December 2018.   
12 Bank of America Merrill Lynch, The Thundering World, Nov. 18, 2018. 
13 Deka, Economic Forecasts, December 2018 – January 2019.