In 2019, the fiscal stimulus in the United States is likely to change from a tailwind to a headwind and the country is likely to re-couple with the global economy into a slowdown – but this should not panic investors.
The main theme in 2018 was above trend global growth with gradual economic deceleration and an upward interest rate trajectory. The US led the way, remaining decoupled from the global economy and this strength was reflected in a strong US dollar.
Global equity markets were expected to grind higher on the back of relatively strong earnings growth.
But as the year went on, there were increasing signs that economic deceleration was starting to pick up pace. In the US, the Republicans lost control of the House of Representatives to the Democrats suggesting that there would be no second phase to President Trumps fiscal stimulus. The US Federal Reserve (Fed) nevertheless maintained its rate hiking stance on a relatively upbeat assessment of the US economy and a tight labour market.
The combination of weakening growth, with obvious implications for earnings growth, and a rising cost of money via further rate hikes, started to unnerve risk markets with global equity markets pulling back meaningfully towards the latter stages of the year.