What a year 2018 has been: US GDP growth hit 4%, Global Earnings Per Share (EPS) rose to all-time highs, US taxes were cut by $1.5tn, US corporates bought $0.8tn of stock, unemployment fell to multidecade lows in the US, UK, Europe, Japan…
…And yet…
Cash outperformed stocks & bonds for the first time since 1992. Losses in both US Treasuries and US Investment Grade (IG) bonds were the third largest since 1970, Emerging Market (EM) Credit spreads widened significantly, Global equities were down more than 20% peak-to-trough, and total returns from US Treasuries, high-yield (HY) and IG debt alongside equities, and commodities, were all negative in 2018 (for the first time since 2008!).
Equity drawdowns in 2018 have been remarkable for their extent, the frequency of consecutive negative days, and the synchronised decline in all the major markets. The most common fundamental cause of the severity of equity corrections was an increase in investors’ perceptions of downside, or even recessionary, risks to the global economy. Dramatic talk about trade wars obviously exacerbated the drop in confidence.
Despite weaker economic momentum and volatile financial markets, the European Central Bank (ECB) (the central bank which has most distorted asset price valuations since 2012) reiterated its intention to stop using large liquidity injections to support economic activity and asset prices. These signals echo those that the US Federal Reserve (the Fed) has been sending for a while now.
The simple truth is that asset prices and central bank liquidity growth both peaked in the first quarter of 2018…and they have both fallen ever since.
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