The last time year-ahead forecasts from major global research firms were this pessimistic was during the depths of the financial crisis. The negativity has been so pervasive, stoked by a series of major downdrafts in equity and commodity markets, that it’s been difficult to maintain an objective perspective about investment prospects for 2019.
As a firm, Merrill Lynch has been among the most bearish. The company’s Hong Kong-based equity strategist Ajay Singh Kapur wrote that outside the United States “our indicators point to a pervasive and persistent global downturn. … We are at a critical juncture where the risks have risen sharply – a pervasive and persistent global downturn, a shrinking real global monetary base and broken technicals.” He added that if central banks do not enact more stimulus “we think the world may be sleepwalking into a potential landmine.”
Terrific. The forecast has obvious and significantly negative implications for domestic commodity stocks in that it implies sharply lower demand. It also doesn’t bode well for industrial companies with significant revenue from outside of North America.
Mr. Kapur specifically exempts the U.S. economy from his warnings so Canadian investors can just allocate more assets to the S&P 500, right?
Well, not if Goldman Sachs’s projections for the United States are to be believed. Goldman strategist David Kostin does predict modest single-digit percentage growth for American equities in 2019, but also expects that volatility will be so high that in risk-adjusted terms, “cash will represent a competitive asset class to stocks for the first time in many years.”
Mr. Kostin also predicts that the U.S. yield curve will invert in the latter half of next year – the 10-year bond yield will drop below the two-year Treasury yield – and this has previously been a reliable indicator of recession, albeit with a significant lag.
Canadian economists and strategists are, in general, more constructive about their outlooks, but even domestic research contains ample reason for investor concern. In a Nov. 20 report called Be Careful Out There, CIBC economist Avery Shenfeld wrote: “There’s already evidence that the effects of higher [interest] rates are showing up earlier and with more ferocity than in past cycles.”
This is only a small sampling of the gloom and doom out there. HSBC’s prominent economist Stephen D. King argues in Hope, Fear and Reality: Why the World is Still Financially Fragile that many of the issues behind the financial crisis are still with us, just moved into different places. In Don’t Trade a Bear Like a Bull, Morgan Stanley strategist Michael Wilson (whose 2018 forecasts were arguably the most accurate of any Wall Street pundit) notes that trading patterns already resemble a bear market.
This is a column about pessimism, but I should point out that positive outlooks are out there and more will be published in the coming weeks. Citigroup strategist Tobias Levkovich wrote Things to be Thankful For in a Dreadful Market, which included positive indicators such as the outperformance of value stocks, the relative safety of health care and continued strong U.S. loan growth.
Still, the degree of research misery this week was overwhelming, even taking into account the terrible market action. I’m still trying to process it while avoiding the immediate temptation of succumbing to bearishness or the reverse reaction of reflexive contrarianism.
One thought that does help is that the biggest pitfall of strategists is extrapolation – predicting that recent trends will continue at the same pace. In a market and global economy in flux, this is less likely to be the case and possibly the pessimism is a short-term phenomenon.
Scott Barlow, Globe Investor’s in-house market strategist, writes exclusively for our subscribers at Inside the Market.