Economic growth for many of the world’s biggest economies is expected to slow in 2019, yet China appears to be the only one planning on implementing economic stimulus. While a bounce from China’s stimulus is possible, we believe global growth is likely to slow as the economic cycle nears a peak, leaving investors to consider reducing volatility by trimming the more volatile asset classes such as emerging market stocks.
Recent stock market behavior and our belief in heightened risk of a peak in the global economic cycle in the next 6-18 months, makes it a good time to consider what has happened to stocks in a typical recession and bear market.
Recent market volatility has made some investors wonder if the economic cycle is ending and stocks are at the start of a prolonged decline. One indicator we are watching for signs of the potential for a recession and a deeper and prolonged decline in stocks is the gap between the unemployment rate and the inflation rate. This indicator suggests that the risks are rising.
We believe there are three positives, three negatives and three wildcards for stock market performance in the fourth quarter. We expect the balance of these factors to result in further gains for global stocks.
EM stocks are prone to high volatility, as we have experienced this year. We will be watching the signs closely to see if this is typical volatility or something leading to a deeper and more prolonged downturn.
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