InvestNow News 2nd August – Morphic – Global Market Outlook – H2 2019
July 29th 2019
“It’s supposed to be hard. If it were easy, everyone would do it.” Tom Hanks, A League of Their Own
Our market outlook for the second half of 2019 looks at the economic data as an attempt to anticipate what will happen for the rest of the year.
This outlook was part of our latest Half Year Report which was published earlier this month.
In January 2014, over five years ago, we wrote in our Half Year Report: “As a nervous January in the markets comes to an end, we still believe the ending of active monetary printing is unlikely to derail the economic recovery in the US”.
In July 2015, “[…] the consistency of our view that markets are more than ever driven by the monetary cycle. It has been this protracted low interest rate environment and the endless pushback in expectations as to when it would end that has prompted us to stay so fully invested since the Fund was launched – and if anything, our failing has been in not having a more aggressive risk appetite.”
In January 2016, “Either course starts with the same question: how many hikes will there be in this cycle? The secondary questions are: has the US erred by hiking at all? How can you justify raising rates with so little inflation?”
In July 2017, after the Federal Reserve had begun the hiking cycle: “it never looks like higher rates are having an effect, until it is too late. The hard part as an investor is how to position yourself in this phase of the cycle… Selling early and carrying a lot of cash isn’t just somewhat costly for investors, it’s extremely costly. Markets charge a high fee to claim intellectual bragging rights.”
We repeat the above for a few reasons. Firstly, directionally the firm was right: the cycle will be longer than expected – so stay invested – yet capitalising on this has been incredibly difficult as per the opening quote, with the large drawdowns of 2016 and late 2018.
Secondly, we now have answers to a few of the questions posed over the years. Q: How many hikes in this cycle? A: With the markets implying close to 100% probability of a rate cut in July, nine hikes was what the Quantitative Easing (QE) post-GFC system could bear (Figure 1). Substantially more than the bears thought, but also much less than prior cycles.