John Chatfeild-Roberts: Why markets left 2018 with a whimper

By Charlotte Richards

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Jan 24, 2019

Few investments saw high returns last year

Markets last year were akin to a boxing match, with investors strutting into the ring in January 2018 full of beans and swagger, but ending it on the canvas, down but not knocked out. It was a bruising year, especially for equities globally, and despite a short-lived post-Boxing Day burst of enthusiasm, very few stockmarket indices closed the year at a level higher than 12 months previously.

Temporary truce in trade war

President Trump’s head-on clash with China and Europe was the game-changer as he attempts to reset America’s international agenda and reassert its authority. The trade war with China was due to ramp up significantly from 1 January 2019, however talks between Trump and president Xi at November’s G20 meeting secured a temporary truce until spring.

Since Christmas there has been further contact between the two leaders (“a good talk, a very good talk,” reported Trump), but no concrete outcome. Still, it has given markets a modicum of hope (if not confidence) that there may be progress in the new year. There have been false dawns before and given the long-term strategic struggles as the world’s geopolitical tectonic plates shift and grate, we think it is still prudent to assume tariffs remain a real threat to global trade until they are definitively removed from the agenda.

Trump has also been vocal in his criticism of the Federal Reserve. Although the appointments of a chairman and its fellow governors are political, the mandate of the Federal Open Markets Committee, which sets US interest rates, makes it clear that the FOMC should be independent of political interference and its members free of party-political partisanship.

With equity markets stalling and the US economy showing signs of slowing, neither of which suits Trump’s political agenda, he has very publicly attempted to sway FOMC policy, tweeting that it would be making a “terrible mistake, a really terrible mistake” if it continued to raise interest rates.

Faced with above-target inflation, unemployment at a 40-year low, and an economy still likely to grow at 2.5 per cent in 2019, the FOMC under Jerome Powell has been firm in its view that it should indeed raise interest rates, with the latest quarter point increase bringing the total number of rises to nine since the current cycle began three years ago.

Markets now assume that, with the Fed still pursuing a twin-pronged approach to monetary policy of raising interest rates while simultaneously shrinking its balance sheet, the pace at which interest rates increase from here will slow, with perhaps two interest rate rises in 2019 instead of the four which had been assumed six months ago. If there is a fear, it is that the combination of this monetary tightening and the frictional effect of tariffs will throttle US economic growth. The Fed is dancing on the edge of a cliff and the consequences of a slip-up are serious.

Opec tries to stabilise oil prices

The final months of 2018 brought some cheer both to hard-pressed motorists and homeowners who rely on heating oil and gas, but much less so to those companies which produce and refine oil and those countries whose economies depend on exporting it.

The oil price tumbled from a high of $86 (£68) per barrel at the start of October to $60 per barrel by the start of December as most producers continued pumping as the global economy was decelerating, so inventories had been building and depressing the price of crude.

Opec met in December for its half-yearly session to set production schedules for the next six months, deciding to slow production by 1.2 million barrels per day in an attempt to help stabilise the price at around $60 per barrel. That plan worked for about a week before the oil price slipped again, hitting $50 per barrel on Christmas Eve, a level last seen in August 2017.

Over the Christmas and New Year period it was a relief to have a break from wretched Brexit.

Crunch time approaches with a wide array of outcomes still within the realms of possibility. As investors are running global mandates, Brexit is just one of many factors we need to consider when managing our portfolios.

So we’re interested, but not obsessed, by the political progress – or lack of it.

John Chatfeild-Roberts is head of strategy for the Jupiter Independent Funds team

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Money Marketing

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