Sooner or later, some political shock will disrupt the current happy balance of robust global growth and low inflation, as US President Donald Trump’s trade wars and oil sanctions almost did last year. But until such a shock actually happens, investors can sit back and enjoy their porridge just the way they like it.
LONDON – With Wall Street hitting all-time highs and the US economy certain to set a new record next month, it seems a lifetime since the despondency in financial markets at the end of last year. Fears of recession have been completely refuted, and investors who shared the view expressed here in early January – that markets were just going through a bout of irrational panic – have enjoyed the strongest start to a year since 1998.
The market’s roller-coaster behavior is easy to explain, at least in hindsight. Investors were understandably worried by four risks last year: overly aggressive US monetary tightening; escalation of the US-China trade conflict; soaring oil prices (possibly returning to $100 per barrel or higher); and another euro crisis, precipitated by the unprecedented left-right populist coalition that emerged from Italy’s election. By the end of the year, however, all of these risks had subsided: the Fed executed a dovish U-turn, the US-China trade war moved toward a ceasefire, oil prices fell, and Italy resolved its fiscal clash with the European Commission in a fairly innocuous truce.
With all of these problems receding, the surge in equity prices from January onward was understandable, and even predictable. The question now is whether this rebound will lead to a resumption of the bull market or turn out to be only a temporary bounce.
In my view, the bull market will continue, despite the fact that it has already broken records for longevity. The US economic expansion will also break historic records when it enters its eleventh year in June. The fundamental reason is that the combination of very low inflation and decently strong economic activity that has characterized the world economy since the 2008 financial crisis shows no sign of ending.
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