It turns out that we are not entirely hostage to immutable economic cycles or raging political intrigue. Sometimes people make good decisions in spite of our expectations. Sometimes, to be honest, we are just plain lucky and the dice land well.
As you read through the market retrospectives that have hit your inbox this month, it’s worth making a separate list of all our fears that didn’t come true. It turns out that we are not entirely hostage to immutable economic cycles or raging political intrigue. Sometimes people make good decisions in spite of our expectations. Sometimes, to be honest, we are just plain lucky and the dice land well.
YEAR TO DATE RETURNS
INDEX, 1/2/2019 = 100
Source: Bloomberg. as of December 20, 2019.
Next year may not be so good. Indeed, the cozy consensus that we are heading for a year of steady growth, low inflation and sound monetary policy rings too good to be true. But nothing is inevitable, and with just a few short days to go, you can pretty confidently cross these worries off your list for 2019.
- The Fed didn’t trigger a recession after all and managed to loosen monetary policy gently, but sufficiently, to set the yield curve back in its proper shape. Some of us thought the rate-setters were too responsive to market jitters last December, but it turns out they were right that the real economy needed a boost.
- Congress didn’t shut down the government again, as seemed likely after the Democrats reclaimed control of the House last November. There was the small matter of the Impeachment of the President of the United States, but both parties managed to keep the lights on and avoid self-inflicted economic damage. (The House even passed a trade deal, too.)
- Slowing global growth, mounting trade friction and falling capital spending did not lead to any weakness in the U.S. jobs market. Companies kept hiring and shoppers kept right on spending in spite of the political noise and the forecasters’ gloom.
- The European Central Bank chose a French, rather than a German president. Germans are wonderful, thoughtful and generous people, but they and their Nordic neighbors tend to draw from a narrow set of dated economic textbooks that would have tightened monetary policy and further thwarted Europe’s stumbling recovery.
- Chinese authorities didn’t lose control of their slowing economy as they sought to rein in excessive credit growth. Impressively, they have managed a mild recovery in the industrial outlook, even as they accelerated the pace of corporate bankruptcies, and they have expanded financial market access still more in spite of the continuing U.S. trade friction with Washington.
- Speaking of trade friction, Beijing and Washington did not end the year in a wave of escalating recriminations. The stand-off between these two very different economic systems remains the central risk to the world’s markets, but both sides have opted for a temporary truce that avoids escalation to new tariffs or sanctions, for now.
- Britain didn’t crash out of the European Union in a spasm of political dysfunction. There will be plenty of brinksmanship ahead in the negotiation of a new trade deal, but London’s relationship with Europe will not change dramatically.
- Italy’s budget did not provoke a crisis that might have threatened its place in the euro area. Of course, there wasn’t much progress on the Italian debt trajectory or European monetary institutions, but Europe’s leaders demonstrated once again their creativity in postponing confrontation and papering over differences.
- Mounting tensions between Saudi Arabia and Iran did not trigger a spike in oil prices, and markets demonstrated just how plentiful and diversified supplies remain. Indeed, an outright attack on a Saudi refinery caused barely a flutter in global prices.
- Emerging market crises did not trigger a global recession. Unrest that spread across Latin America in particular caught investors by surprise, but years of economic policy that included flexible exchange rates and lower leverage helped limit the financial turmoil.
As for next year, the similarity among forecasts that promise more of the same should set off alarm bells for any investor. If everyone puts on the same trades, market prices may overshoot and it will all end in tears.
Still, it’s difficult to see what will knock us off the current course. Growth could start to slow again, but central banks stand ready to cut rates and governments (even in Berlin) seem prepared to spend a little more. Inflationary pressures could return unexpectedly, but it’s difficult to envision how price expectations will spike suddenly. Trade tensions between the U.S. and China (and possibly Europe) will likely return, but maybe companies are learning to live with tariff uncertainty.
"As for next year, the similarity among forecasts that promise more of the same should set off alarm bells for any investor. If everyone puts on the same trades, market prices may overshoot and it will all end in tears."
And then there is the small matter of the U.S. election. Will markets sell off on the re-election of a famously divisive and unpredictable president who will have a hard time repeating his first act cutting taxes and regulations? Or perhaps they’ll unravel on the prospect of a Democrat promising more taxes, more spending and a new push on climate rules?
Plenty to worry about as the next decade dawns, but for now it’s also worth remembering this year’s moments when good decisions—and good fortune—helped us avoid worse outcomes.