Investment markets in late 2018 decided it was likely that the world economy was approaching a recession. The prevailing thought was that banks would end up with billions in bad loans and interest rates would return to zero. We didn’t agree with this reasoning in December, and we continue to be skeptical of it today. Consumers in the U.S. and most other industrialized countries are in their best financial position in 50 years. Central bankers around the world continue to provide ample liquidity and are acting to keep interest rates at historic lows. The movement toward more economic freedom and away from socialism is alive and continuing to progress, albeit slowly.
We believe the world economy will continue to grow in 2019. It may be at a slower pace than in 2018, but it will be growth nonetheless. Also, interest rates are likely to rise slightly in the coming year.
The stock market developed a love affair with growth stocks about 6 or 7 years ago. Buy growth at any price was the mantra. We believe this love affair is now on the rocks (witness Apple, Netflix and Tesla). We see value stocks – the laggards of the last 6 years – beginning to get some affection. Steady earnings, increasing dividends, stock buy-backs and good balance sheets do matter. A dominant position in an industry also helps. Last year, banks, energy, pharmaceuticals, basic materials and computer chips were laggards. While the fundamentals of these businesses were good, their stock prices were down. This dichotomy will change in 2019.
The political atmosphere stinks. Partisanship is worse than ever. After nearly one month, the U.S. government remains shut down. Brexit issues overhang Britain. China’s trade dispute with the U.S., Canada and Europe remains front and center. Budget deficits are obscene. It is easy to get depressed.
However, political events like the above are not likely to cause a major world recession. We continue to believe in the economic potency of creative entrepreneurs, the world citizens that produce and trade with each other. Their determination to create a better life for themselves tends to overcome the incompetence of their governments.
We remain constructively positive on the outlook for the world economy and investment markets.