Stock Market Tantrums Are Over, But For How Long?

Equities have been behaving like a recession is looming. That dire outlook seems overdone. While major global stock markets were battered in 2018 – and even the initially resilient U.S. Standard & Poor's (S&P) 500 stumbled – we still expect equities to deliver solid returns in 2019. Assuming no price-to-earnings (P/E) expansion this year, and tagging on a 2% dividend, the S&P 500 could return 8%. Any modest P/E expansion could deliver 12% returns. Bank earnings this week, including JP Morgan and Wells Fargo, are likely to restore some faith in equity markets over the short-term.However, trade tensions between the U.S. and China and fears over Federal Reserve System of the United States (Fed) tightening are definitely taking their toll on investor sentiment. Earlier in January, Apple posted a reduced revenue outlook, blaming Chinese demand, causing its stock price to tumble. Yale University’s Stephen Roach warned that it was “the canary in the coal mine.” These fears could strangle growth, but fundamentally, the bleak backdrop for equities is starting to improve. Investors want evidence that the Fed is not on autopilot, and will continue to be hyper-sensitive to data disappointments until they get some positive U.S.-China trade news. A reduction in these risks could see an expansion in the P/E ratio – delivering a boost to equity markets. The good news is that trade tensions are easing. Face-to-face trade talks are underway with key negotiators, Robert Lighthizer representing the U.S. and Liu Hi from China, engaged. Both are highly trusted by their respective Presidents, so can negotiate with authority.