How should investors respond?
We are feeling more unsettled on the basis that there are conflicting fundamental signals combined with an uncertain political environment.
The 2020 US presidential election will be relevant throughout the coming year, as US economic momentum (if it can be achieved) will likely mean Mr Trump is voted in for a second term in 2020.
Perhaps Mr Trump will feel that a trade deal with China would do this. Perhaps Mr Powell will give a more adaptable impression to investors.
One or both of these things would be positive for risk appetite, but neither should be relied upon as we sit here today.
For now, Heartwood IM maintains a slight preference for global equities, as some of the economic cracks mentioned earlier may be based on transitory factors.
However, any significant deterioration in economic data would lead many investors to seek a safe harbour elsewhere; we would probably be among them, but this raises the question of where to go.
Since higher bond yields likely accompany any future outcome, investors need to re-think the use of bonds as diversification tools.
With this in mind, we opt for fixed income positions with low sensitivity to interest rate changes, and have recently been adding to portfolio diversifiers and insurance. This includes tools designed to mitigate sharp and unexpected falls in investor sentiment (including higher volatility winners, as we term them, and other specialist protection strategies).
Gold is another part of the diversification stable – if a financial crisis looks anywhere near possible, this very traditional asset class should start to find itself in considerable demand.
As 2019 begins in earnest, topics surrounding trade and Brexit will continue to dominate the political sphere, while the economic backdrop will be driven by central bank policy and any factors able to influence the length of the current cycle, like government spending.
Markets, of course, are capable of reacting to both political and economic triggers.
Graham Bishop is investment director at Heartwood Investment Management
