E Hello, Goodbye

I say high, you say low

You say why and I say I don't know, oh no

You say goodbye and I say hello – Beatles, 1967 

We end the 2018 Annus Horribilis with a clash of hope and fear, a duality of better growth for the US and worse for China and in that divergence blame for a rising tide of uglier politics, anti-global sentiments, and renewed market volatility. The outlook for 2019 converges upon the global recovery receding with the US/China trade war and its fragile peace fractured by other clashes about US hegemony from Russia, to Turkey, to Europe, to the Americas. The US midterm elections did little to assuage fears of the ongoing rise for President Trump in dismantling the global order as the divide in the US politics finds similarities in the UK and Europe. The chart of a nation divided becomes a metaphor for deconstructing the year and building out a view for 2019. 

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Let’s start with the last week, then the December 2018 month in review and work back to the highlights of 2018 to get a perspective on what may be different in 2019 and whether the same themes from last year dominate the year ahead. The bounce back in US equities from last Monday stands out. The rally isn’t sufficient to make 2019 easy but it took some of the pain away from December. The result for the year is likely to remain horrible and sets the tone for whether the market is flashing a yellow sign to the Fed to ease or at least stop raising rates.  The focus on FOMC policy and its divergence from the rest of the world was part of the year and part of the reason for why this was an annus horribilis. 

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The strength of the present US economy contrasts to the gloom in equity markets.  The start of a bear market (defined as >20% from a peak) was in effect for much of the world and that engulfed the US as well this last week on Monday but the reaction of markets is to future expectations rather than present conditions. The battle of how to balance risks breaks like the see-saw of bonds against equities. The magic of QE and zero-interest rates in inflating assets prices now becomes the deflation and the reality of paying the bill. Passive gains reverse into active fears after a decade of easy money. The data dependency of the FOMC clashes with the uncertainty of global politics and growth whether in China, Europe, UK or most emerging markets.    

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There are a number of key elections in 2019 – India is a case in point as the contrast of the China equity bear market and the absolute power of Xi contrasted in 2018 with the erosion of Modi’s power and the solid returns from India’s Sensex.  The risk of a coalition government in India in 2019 will be key along with the response of the RBI to oil deflation vs. currency weakness. 

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The European elections in 2019 are also important as they set up the leadership of the EU for many key positions with implications for Brexit, US trade, NATO, Russia, and Turkey. The problem is that the vote is likely to be less about winning over voters and more about apathy as the participation rate is expected to be low – opening up extremist views on both sides.

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The money to be made in 2019 from markets will be watching volatility and how that changes the equation of asset management processes and returns.  The world from 2009 changed with the ZIRP and QE policies driving a “TINA” (there is no alternative) to passive equity ownership. This chart from 2018 will be interesting to view at the end of 2019 as markets forcefully readjust to a world without a Powell Put.  The shift away from financial conditions to a more medium-term reactive Fed will drive up costs in managing money and drive down the risk/return ratios of passive investments. The limit of technology and speed of trading in a more diverse and regional world will also play a role. 

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