The number one concern is the ongoing trade spat between the US and China which is now beginning to impact on corporate America if this week’s Beige Book evidence is anything to go by. We also have to add the fact that the tax cuts implemented at the beginning of this year have given corporate earnings a big lift which will not be repeated next year. As investors look ahead to 2019, they see an earnings outlook that is far less rosy. Looking further afield, Brexit issues; the ongoing dispute between the Italian government and the European Commission, and the diplomatic spat between Turkey and Saudi Arabia add to the sense that all is not well in the wider macro world. Global investors have good reasons to be nervous.
Then there is the Fed’s rates policy, which looks set to drive interest rates still higher. There are those who believe that the recent market wobble is a good reason for the Fed to pause. I do not see why. After all, if low interest rates were responsible for driving the market up, so higher rates might be necessary to get it back into line with fair value. In any case, it has been slightly puzzling that the market has continued to go up despite the Fed’s tightening, which can only be attributable to the one-off tax cut. A pause that refreshes can only be a good thing. Putting all the pieces together and it is hard to escape the suspicion that in the equity world at least this is as good as it is going to get. This does not mean to say that it is all over. As was the case in autumn 1999, when US markets also wobbled badly, it is possible that there may be a rebound before the final reckoning.
Yet it does not feel like a rerun of the late-1990s. For one thing, the tech companies are delivering real products that generate earnings rather than the hype which characterised the tech bubble. The global economy is far less frothy – particularly in Europe – and investors are a lot more cautious. Nonetheless, many people I speak to are concerned that the US is setting itself up for a recession on an 18-24 month horizon. Maybe! Or there again maybe not! At times like this, it is always worth recalling Paul Samuelson’s famous phrase that the stock market has predicted nine of the last five recessions.