Entering 2019 means that the ritualistic cycle of observing trends will begin all over again. And since all eyes are on markets everywhere, here are a few prediction that will detail how 2019 will shape up for the financial markets at large:
- US Market to maintain relatively high valuation
The USA is now trading at a material valuation premium to other, similar markets overseas. US tech stocks command high valuations and profit margins remain at high levels by historical standards.
The S&P 500 trades at a PE of 18x, which is historically high—especially compared to developed markets outside of the US that trade at around 12x earnings, which is closer to average. That means that the US market is trading at a 50% premium compared to other developed markets. This sort of premium isn’t common in History. As of now, overseas markets seem to be slowly gaining an edge and American investors may be underexposed to this trend.
- Bond yields in Europe remain low
Yields on government debts remain low by historical standards, despite bond yields rising in the US in recent times. In fact, in the case of Switzerland, the yield is negative, and many countries have very low yields. Nonetheless, the fact that US inflation is around 2%, suggests that this may not last.
In the case of US and European rates, the current 2.8% 10-year rate may be too low for them to further rise as both unemployment and inflation remain around historically normal levels. Much will depend on how inflation and unemployment data evolve, but absent dramatic shifts and rising rates may be on the cards for Europe.
- Possibilities of another recession
There is a lot of debate around when the next recession is due. The last two recessions have been a lot worse than average in terms of what was expected. So there is always the uncertainty when the next one will hit and how hard it will hit the economy. Investors are vary, simply because the 2008 experience was so awful and unusual. Recent experiences are stuck in the memory.
Parallels were drawn between the recession in 2008 and the one which happened 80 years earlier. We’d have to be relatively unlucky to see a similar event just a decade from now, even as some say that it indeed is on the horizon.
- The yield curve will remain flat
The US yield curve is flat. This is an implication that the bond market thinks that a recession is indeed very near. Historically, the yield curve has been a good forecasting tool and while flat, it is not inverted yet.
How it will invert in 2019, will be important for the direction of markets. Today, certain smaller portions of the curve are inverted, for example the 3-year yield is below the 2-year yield, despite the fractional differences. The main forecasting insight comes when the 10-year yield falls below the 2-year or 3-month yield in the past. This is something that hasn’t happened yet.
But it may very well in 2019.
- Lucas Cooper (GBO correspondent)