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Note: Unless otherwise specified, currency amounts described in this article are in U.S. dollars, and government references are to the U.S. government.

2019 Market Outlook: Global Stocks and Economy

Key Points

  • Global growth is likely to slow as the economic cycle nears a peak.

  • Trade tensions, inflation and interest rates are key indicators to watch as financial conditions tighten and act as a drag on markets and the economy.

  • Watch the gap between unemployment and inflation rates, along with the yield curve, for signs of a peak in economic growth ahead of a potential recession.

Global slowdown

Global growth may slow in 2019 as the economic cycle nears a peak, with increasing drag from worsening financial conditions combining with full employment and rising prices. Global stock markets may peak in 2019 if leading indicators signal the gathering clouds of a global recession.

If we borrow the severe weather scale for storms and apply it to the global economy and markets, we aren’t forecasting “Recession Warning,” meaning a recession is here or imminent. A better term is “Recession Watch,” in which conditions are favorable to a recession if a number of risk factors (e.g., trade, interest rates, inflation) deteriorate.

While trade tensions have the potential to inflict substantial damage on the world economy, it would require a significant escalation from the measures implemented so far to trigger the next global recession.

Indicators may point to stock market peak

For all the concerns about trade policy, Brexit and other issues, 2018's big stock market declines generally were driven by inflation and interest rate concerns. These are the indicators investors should watch most closely in 2019.

Historically, when unemployment and inflation rates have converged to become the same number—signaling an overheating economy—it  has marked the beginning of a prolonged downturn for the stock market, followed about a year later by a recession. The gap between the unemployment rate and the inflation rate is close to one percentage point in major countries like Germany, Japan, the United Kingdom, and the United States. Another leading indicator, the yield curve, also has shown a narrowing gap between short- and longer-term Treasury yields. These gaps may close in 2019 and signal a peak for international stocks ahead of a global recession.

The gap between the inflation rate and unemployment rate is 1.8 percentage points in Germany, 0.9 point in Japan, 1.7 points in the UK and 1.2 points in the United States.

Takeaways

  • International stocks may continue to see heightened volatility and could enter a bear market if key indicators continue on their current path.
  • Consider reducing portfolio volatility by trimming historically more-volatile asset classes, such as emerging market stocks.
  • Consider rebalancing back to long-term asset allocation targets. Historically, long-term asset class trends have tended to reverse in the year prior to global recessions and bear markets. This may begin to favor international over U.S., value over growth, and large- over small-cap stocks.

Next Steps

Important Disclosures:

Past performance is no guarantee of future results. Forecasts contained herein are for illustrative purposes, may be based upon proprietary research and are developed through analysis of historical public data.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation.

Investing involves risk including loss of principal.

Data here are obtained from what are considered reliable sources; however, their accuracy, completeness, or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.

The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller.

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.