Dimming global growth prospects and an unpredictable end to the trade negotiations between USA and China put a definite damper on the market sentiment.
Furthermore, the term spread – the difference between long-term and short-term government bond yields – was about to turn negative in the US, which represents roughly 60 per cent of the MSCI World Index market capitalisation. Historically, a negative term spread has been a harbinger of recessions. This time, it was partly brought about by the Fed Funds rate having been hiked by a full percentage point in 2018, the latest increase as late as December 19. At that time, Federal Reserve was still convinced that real economic growth was strong.
When in fact the term spread did turn negative, a few months into 2019, there was no shortage of worried comments (nor of attentive listeners). From August 2018 to April 2019, the number of Google searches for "recession" nearly doubled. There was indeed reason to worry. In just six months, IMF revised its 2019 global growth estimate from 3.9 to 3.5 per cent, only to be cut even more – down to 2.9 per cent – before the year was through.
“From August 2018 to April 2019, the number of Google searches for "recession" nearly doubled.”
As 2019 progressed, expectations rose that Federal Reserve would rather cut the Fed Funds rate than enact further increases. The first cut came in July, a quarter point, followed by two cuts of the same magnitude in September and October. September also saw the European Central Bank lower its key rate from already negative -0.4% to -0.5%. A quarter point hike from the Swedish Riksbanken the same month mattered little. Confidence rose.
This made it all the more difficult to find sensible alternatives to equities, leading to an autumn rally in the stock market. The Oslo Børs benchmark index, which mid-August was just above its level when entering 2019, ended the year with a return of 16.5 per cent. In the US, where the rebound from 2018 was stronger, the S&P 500 closed the year with a total return of as much as 31.5 per cent.
Globally, fixed income spreads tightened this year by some 60–70 basis points for investment grade and 170- 200 basis points for high yield. In the Nordics, which was less affected by the preceding year’s market slump, the tightening was less pronounced, but still strong.
Thus, 2019 offered two very useful reminders: Low economic growth does not go hand in hand with weak financial markets. And, similarly, fear, unease and investor tension do not presage low financial returns. On the contrary – these are rather common fixtures of all financial markets. That’s just part of their nature.
For our funds, 2019 can clearly be summed up as a good year.