The US economic expansion that began in 2009 is already the longest on record. Despite global trade worries, it shows few signs of ending. Consumer confidence remains high and unemployment has fallen to 3.5%, its lowest level in nearly 50 years.
A decade of uninterrupted growth has helped global stock markets post returns in excess of 300%, but this bull market has not always felt good. There were bouts of volatility in 2012 and 2015, and again over 2018-19. But persistently low inflation since 2009 has allowed central banks to step in to prevent any mini-cycle downturn developing into a full-blown recession.
Responding to the 2012 euro area crisis, the European Central Bank was able to trigger recovery by printing money and promising to do ‘whatever it takes’ to keep the euro together. In 2015, it was dramatic easing in China that turned things around in the light of the commodity price slump.
I believe widespread monetary ease will deliver relief this year. Central banks are cutting interest rates or printing money in the US, euro area, China, Japan, Russia, Brazil, Mexico, India, Indonesia, Australia, Singapore and Turkey. If I am right, this business cycle has further to run, and stocks should continue to outperform bonds over the next couple of years.
Royal London’s Investment Clock model, which relates the performance of different investments to the global business cycle and guides the firm’s asset allocation, is in the equity-friendly ‘recovery phase’. This is a marked improvement compared to the stagflationary backdrop from around this time last year when growth was slowing, inflation was increasing, and the Federal Reserve was raising interest rates.
Stock markets could simply grind higher as global growth firms up. However, there are three significant potentials triggers that could lead to opportunities to buy at lower prices.
The world economy could get worse before it gets better. Business surveys reveal scant few signs of improvement, and global trade remains fragile. The US-China trade dispute is dragging on, and the White House could at any moment take serious umbrage, whether warranted or not, at Europe. A step up in rhetoric could easily damage sentiment.
A no deal Brexit has the power to push the pound sharply lower and rattle global stock markets. Even an agreed deal could quickly usher in another period of uncertainty over the future trading relationship, given the shortness of the planned transition period.
A broadening of the Middle East conflict would dent investor sentiment. Every US recession in the last 50 years was either caused or exacerbated by a sustained rise in oil prices. So far, markets have taken in stride the production outage that followed the attacks on Saudi Arabian oil facilities.
Trevor Greetham is Head of Multi Asset at Royal London Investment Management.