Investment markets in late 2018 decided it was likely the world was close to entering a recession. The thinking continued that banks would end up with billions in bad loans and interest rates would return to zero. We didn’t believe this in December, and we continue to be a skeptic of this logic. Consumers in the U.S. and most other industrialized countries are in their best financial position in fifty years. Central Bankers around the world continue to provide ample liquidity and are keeping interest rates at historic lows. The movement towards more economic freedom and away from socialism is alive and making slow progress. We believe the world economy will continue to grow. It may be slower growth but growth none the less. Interest rates are likely to move up slightly in 2019.
The stock market developed a love affair with growth stocks 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. Dominate positions in an industry also helps. Last year banks, energy, pharmaceuticals, basic materials and computer chips were laggards. While the fundementals of the businesses were good, the stock prices were down. This dichotomy will change in 2019.
The political atmosphere stinks. Partisanship is worse than ever. Government shutdowns exist. Brexit issues in Britain remain. The China trade dispute with the U.S., Canada and Europe remain front and center. Budget deficits are obscene. It would be easy to get depressed. However; political events like the above are not likely to cause a major world recession. We remain on the side of the creative entrepreneurs, the world citizens that produce and trade with each other. The desire 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.