2019 Outlook: A Year of Transitions

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Trade, higher interest rates and politics dominated financial markets in 2018, resulting in a volatile and challenging year for investors. After a strong run, global equity markets corrected, adjusting to a new environment of higher rates and a less accommodative Federal Reserve. Even fixed income provided little reprieve for investors as a drift higher in interest rates delivered little in the way of return. We believe 2019 will be a year of transitions. Unlike the start of 2018, when economies around the globe were delivering synchronized growth, we expect the long global expansion to endure but transition to a slower pace. The relative deceleration in growth is due in part to the fading of U.S. fiscal stimulus and the reduction of financial liquidity as other central banks join the Fed in tightening monetary policy and winding down quantitative easing programs. But with inflation expected to remain contained and our projection of interest rates moving only modestly higher, solid earnings growth should support equity markets. We do not expect a smooth ride, however. The market volatility that appeared this year should continue, as uncertainty around monetary policy, trade, and potentially disruptive geopolitical events persists. The transition to slower global growth, the fading of financial liquidity and more modest return expectations require a more balanced and active approach between return and risk within portfolios as we enter the next phase of this long global expansion.