Should we fear a bear market in 2019?

We have a strong tendency to prolong end-of-year markets trends into the following year. After the severe correction of October 2018, November’s mitigated market rebound and December’s important steps to make (UK parliamentary vote on Brexit, FOMC, European finance ministers’ response to the Italian budget, …), investor sentiment is very cautious, in sharp contrast to last year’s more optimistic outlook.

Should we expect a market downturn next year? We have reasons to be more cautious: the economic context is likely to be less favourable, central banks in developed countries will continue to tighten, and fiscal and monetary margins of maneuver – should a crisis emerge – are limited. Markets are twitchy. Volatility is spreading through all risky assets, and with faster and stronger spikes. Investors’ conviction levels appear low, fluctuating from worst-case scenario to a more optimistic outlook in the space of a few days.

So which way will the scale tip? Equity market valuations have already priced in an economic slowdown and higher risk premia. The likelihood of a recession in the foreseeable and short-term future is low. In this context, corporate profits should continue to show positive growth. Central banks will show their pragmatic side and adapt the pace of their tightening to the economic conditions. As a result, our baseline scenario continues to foresee a moderate equity market rise next year. The risks, as every year, are manifold and could affect both confidence and growth. That’s what happened in 2018. 2019 may turn out differently.