Bullish Recovery? Is 2019 going to be a good year?

Last year's mass equities sell-off spooked investors. The last couple of months were troublesome for major banks and in particular, hedge funds. However, some groups bucked this trend, with Citadel's investment fund yielding positive returns on its tangible assets and increased dividends to shareholders. With markets recovering from this, what does this mean for the year ahead? And what about the inversions in the US yield curve? There are 2 key points to consider here.

S&P 500 Market Index. Source: See It Market

1. Everything points to the US Fed

The US Fed hold the keys to what happens with interest rates (and the world's reaction). For many years, particularly after the crisis of 2008, the fed kept interest rates very low. When this happens, we assume the norms of economic behavior to follow - lower interest rates lead to increased consumer spending, since access to credit is much cheaper. Thus, aggregate demand for the global economy may increase and hence we reap the benefits - lower unemployment and positive inflationary pressures. However, global equities should be considered here. For the past years we have seen firms aggressively using share buyback schemes to boost their share prices in the market, quantitative easing that has instead inflated asset prices way above their fundamentals and weaker then expected bullish ruckus in blue-chip shares. With Powell expecting to potentially raise interest rates, surely then the market ahead should continue it's bullish rally?

2. Inversion of the US yield curve - Something to worry about?

The brief inversions of the yield curve in the past used to be a pretty good indicator in the market showing signs of slowing global growth and the rise of a global recession. The reason why is because the curve plots bond (safe investment asset class during recessions) yields from shortest maturity to the highest maturity. As a result, this is considered as a barometer for economic sentiment. With a brief dip this March, why hasn't the dip had an impact? Again, the idea behind quantitative easing measures and aggressive share buy backs has made telling whether the economy has just had enough or can continue churning. The chart below can show the impacts of previous dips in the curve.

US Yield Curve. Source: Ryan ALM

We should interpret this with some confidence, given the fact that this is not as perfect an indicator as it used to be. Firstly, the lack of actual recessions in the economy. Only a handful of global crashes, such as the great depression and 2007 makes forecasting recessional events harder - a simple market correction goes a long way in consolidating markets. In addition, out-of-date data, as tied to the above point, can make interpretation to the chart even more ambiguous.

However, the yield curve has a decent track record, as far 1982 is concerned. The yield curve tends to seemingly invert reliably with little doubts. We often see the economic recessions after the inversion occurs, as shown in the chart below. The shaded grey areas indicates times where economic decline has been recorded. Therefore, it is possible that a 2019/2020 recession may be looming around the corner.

Grey areas showing the aftermath of US inversions. Source: Forbes, Federal Reserve Bank of St. Louis.

To conclude, the year so far has been solid in performance. With bonds still popular and equities down, there may still be hope later on in the year. With improving trade talks between China and the US and an extension to the Brexit deadline until Halloween 2019, markets may have the confidence and momentum to drive the bulls the entire way.