A recession still looks unlikely without an economic shock. However, it’s worth noting that the scale of the recent monetary tightening has historically been sufficient to push the economy over the edge.
A key theme that will drive both sentiment and the market over the year will be whether the Fed has gone too far or has been able to engineer a ‘soft landing’. Evidence that the US is headed for a soft landing will probably see markets move higher. Conversely, further disappointing data poses risks to the current rally, not least given the strong rebound in markets since Christmas, which has been driven by more dovish talk from the Fed rather than a pickup in the economic data.
Focus on earnings
Earnings need to be watched closely – after growth above 20% in 2018, boosted by a strong economy and significant corporate tax cuts, this year will see slower growth, and companies that miss already downgraded expectations are likely to see their share prices suffer.
We expect political noise to remain elevated as attention begins to focus on the 2020 presidential election. President Trump, ever mindful of stock market levels, will likely continue to put pressure on the Fed not to raise interest rates – he does not want to fight the next election against a weaker economic backdrop.
We’re hopeful the US will reach a trade deal with China, which would boost sentiment and those industries that benefit from increased Chinese buying. Trade issues will not disappear, however, with President Trump expected to pursue perceived injustices with Europe and Japan, particularly around auto imports.