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4 Market Trends To Watch In 2019

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by , 12-30-2018 at 03:20 PM (189 Views)
      
   
Here are some of the more interesting trends to monitor in the market as 2019 progresses.

1. Relatively High Valuation Of The U.S. Market
This trend has persisted for longer than many expected, but remains notable in a historical context. At the time of writing, the S&P 500 trades at a PE of 18x, with other metrics telling a similar story. That's high by historical standards. On the other hand, developed markets outside of the U.S. trade at around 12x earnings, closer to average. That means that the U.S. market is trading at a 50% premium to other developed markets. Historically, that premium hasn't persisted. In fact we've seen times when foreign markets traded at level above the U.S. It's hard to call when this trend may turn, but history seems to be on the side of overseas markets and American investors may be underexposed to this potential move.

S&P 500

2. Low European Bond Yields
Even though bond yields have risen at least in the U.S. in recent years, it remains true that yields on government debt are low by historical standards. The yield on 10-year Swiss government debt is negative, and many European countries have very low yields. Again, we're a decade into this trend, a have seen four decades of generally declining yields globally as inflation has been tamed. Nonetheless, broader history, and the fact that U.S. inflation is around 2%, suggests this may not last.

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3. The Shape Of The Next Recession
There's a lot of debate around recession probabilities. However, recessions can differ quite significantly. The last two recessions in our memory have been a lot worse than average in terms of their severity. As such, just as important as when a recession occurs is how severe it is, and which parts of the economy are hit hardest. It may be that the next recession is softer, perhaps at least for investors, than many people imagine. This may simply be because the 2008 experience was so awful and unusual. Nonethless, our most recent experiences stick in the memory and may receive more attention than they deserve.

4. The Flat Yield Curve
The U.S. yield curve is flat compared to history. This implies the bond market sees the Fed as close to the end of its tightening cycle. Presumably, the bond market thinks a recession may be close.
The U.S. yield curve is flat compared to history. This implies the bond market sees the Fed as close to the end of its tightening cycle. Presumably, the bond market thinks a recession may be close.

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