Just when you thought we were past the worst of it.
Markets were finally managing to rally after October’s tumble. The S&P 500 may have fallen 10 percent from its record to its worst levels in the month, but this week it logged three straight days gaining more than 1 percent.
In the backdrop is a U.S. economy that is firing on all cylinders, as shown by Friday’s strong payrolls report.
But on the horizon, multiple factors are converging that could signal trouble for markets into next year. U.S. business economists see a recession coming by the end of 2020.
JPMorgan Chase & Co. said Oct. 26 that equities turn sometimes only when the economy enters recession, though also sometimes a year before the slump — so they are looking at potential for a rotation to defensive positioning around mid-2019.
Even after the market’s recent turmoil, some positioning still appears stretched. Allocation to equities is the highest since the tech bubble, while cash is at a record low and allocation to debt is below average, according to a Goldman Sachs Group Inc. report Thursday from strategists led by Arjun Menon, who said they expect investors to reduce portfolio risk in 2019.
Then, there’s geopolitics. JPMorgan strategist John Normand said Thursday in an interview that the number of material political and geopolitical risks “ seems to be quite high going into the next year,” which he attributed partially to the way President Donald Trump’s administration approaches its policy objectives.
With the Federal Reserve expected to continue to raise rates in 2019, some have started to worry that tighter conditions will encroach on growth.
Morgan Stanley’s Andrew Sheets and Cantor Fitzgerald LP’s Peter Cecchini are also watching the Fed, with Sheets writing on Oct. 28 that the Fed was unlikely to come to the rescue of equity investors.
“The odds are increasing for a Fed overshoot,” Cecchini wrote Thursday. “A burgeoning global slowdown (in emerging markets and Europe) combined with a weakening U.S. housing market, will result in higher volatility in 2019.”
London-based CrossBorder Capital weighed in as well.
“We have been concerned throughout this year that the U.S. Fed is hitting the brakes harder than widely believed because rate hikes are occurring on top of balance-sheet shrinkage,” CrossBorder wrote in a note emailed Friday.