We’re heading into the end of the first half of the year, so let’s go through where what we were thinking at the start of the year and where we are now.
The end of 2018 saw another bout of market liquidity squeeze and its associated sharp drop in risk-appetite. Investors want more yield to take risk. In other words, risk asset valuations cheapened in both bond credit spreads and equity price-to-earnings ratios. The rationale for investors’ worries was the fear that the slowdown in Asia and Europe was spreading to the US. The stronger US economy’s momentum at that point meant the expectation of contagion was muted but the US’ higher valuations had left their stocks vulnerable.
In our outlook for 2019 we said upside would come from a pause in the US interest rate tightening cycle which could calm liquidity concerns and reverse the squeeze. That return of investor liquidity we thought might be a circle nearly as virtuous as had been the one for 2018’s last quarter.
