The intersection of several disruptive market forces, many of which have been looming on the horizon for some time, led to the recent sharp and widespread decline in global markets. We feel like this period of heightened volatility is here for a while. Although markets rebounded strongly after Christmas, several underlying concerns remain:
- sluggish economic growth outside the US, particularly in Europe, Japan, Emerging Markets and China
- worry that the US economy, which has led global growth since the financial crisis, might grow at a slower than expected rate
- the likely deceleration in US corporate earnings growth
- apprehensiveness that the trade war with China will get worse
- inflationary pressures in the US because of a tightening labor market
- the on-going government shutdown that could have lingering effects
There is an expectation that U.S. economic growth will continue at a slower pace in 2019, with the risk of a recession rising. Corporate earnings growth likely will slow, as year-over-year comparisons with strong 2018 earnings will be challenging. Trade tensions remain a risk, but inflation and interest rates are the key indicators to watch. The Federal Reserve has signaled that increases in short-term interest rates will be at a slower pace than in 2018 and may pause in 2019.