Podcast Center
Video Center
Webcasts
Resource Center
Events
February 19, 2019 at 03:34 PM
Will this be the year the bull market finally ends?
Despite the fact that 2019 began with the strongest start to the U.S. equity market since 1987, there is no consensus on the future of the bull market. Main Street and Wall Street are going in very different directions. The economy continues to look strong, with low unemployment, rising corporate earnings and strong consumer confidence; yet financial markets are very jittery, with volatility rising, earnings forecasts declining and pricing that reflects the higher risk of recession by taking into account last year’s nearly 20% decline.
Market corrections (declines of 10% or more) typically occur once a year. Over the last 80 years, there have been just 12 recessions — but more than 43 greater-than-10% market corrections.
We believe the financial markets overreacted with the severity of the drawdowns last year, and we do not see signs of an imminent recession this year. Still, that drove the probability of a crash and recession a little higher than it was 12 months ago, so investors should position their portfolios accordingly. Diversification is key.
In retrospect, the fourth quarter 2018 sell-off was provoked by three factors:
- Continued U.S. economic growth — but at a slowing rate;
- Fading effects from the fiscal stimulus of the sweeping tax overhaul passed in 2017;
- Geopolitical uncertainty (tariffs, Brexit, government shutdown, monetary policy shifts).
These issues are unlikely to be fully resolved over the next few months, so investors should be prepared for more volatility and drawdowns as the market continues to reprice risk. But on the positive side, these risks can create opportunities for long-term investors.
Michael LaBella is the Head of Global Equity Strategies at QS Investors, a subsidiary of Legg Mason. His opinions are not meant to be viewed as investment advice or a solicitation for investment.