- Most financial assets have enjoyed a strong start to 2019. Similar moves were seen in early 2018 but they didn’t last.
- Given the similarities, and recent wobbles in markets, many may be asking whether 2019 may be a repeat performance.
- J.P. Morgan says recent weakness in cyclical assets is unlikely to lead to a substantial selloff seen on several occasions in 2018.
As was the case a year earlier, financial markets have enjoyed a strong start to 2019.
As seen in the chart below from J.P. Morgan, aside from the US dollar index, all other assets tracked by the bank have risen in early 2019, substantially in some cases.
As many investors are no doubt aware, the strength seen early last year was not sustained with many assets, particularly those closely tied to the performance of the global economy, falling sharply as the year progressed.
Given the similarities, at least in terms of price action, it’s understandable why some investors may be pondering whether a repeat performance of 2018 is likely?
“Markets are experiencing their first significant correction of the year, though so far a milder one than those of 2018,” J.P. Morgan says.
Vulnerability has been building for a couple of weeks… building despite worsening macro data.
“Most major equity indices are down 2-5% from their peaks, developed and emerging market credit spreads are up 5-25 basis points from their lows, and volatility has rallied in all markets but rates and crude oil.”
So is not the right time for investors to bail upon the early-year rally in cyclical assets, something that ended up being a wise move 12 months ago?
To J.P. Morgan, this time may be different.
“We… have remained invested in the reflation trade across sticks and fixed-income, currency and commodity markets (FICC) for two reasons,” the bank says.
“Neither valuations nor positions looked as extreme as they did prior to this cycle’s other major drawdowns, and we expected policy changes to support growth/earnings expectations in the second half of the year.
“[We’re] mindful of the imprecision around forecasting something as context-specific as drawdown, [although] most conditions still do not look conducive to a repeat of previous episodes.
“Market liquidity is the wildcard, though more in stocks than in FICC on our measures of market depth.”
While J.P. Morgan doesn’t believe recent wobbles are likely the start of a more pronounced selloff in cyclical assets like those seen in February and the final two months of last year, it says that with sentiment towards the global economy unlikely to improve in the near-term, further corrective moves may still occur “on even minor catalysts”.
However, it still sees “constructive outcomes” from US-Sino trade negotiations and an extended pause in the US Federal Reserve’s monetary tightening cycle, two factors that should help to underpin cyclical assets should they come to fruition in reality.