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Ringing in the new year - and new fears
AS the new year fast approaches, there is everything to fear, including fear itself. US stocks were the best of a bad lot in 2018, but strategists warn that the global selloff may hit the New York Stock Exchange with a vengeance in 2019.
The risks are certainly stacked high. First and foremost, the clock is ticking on trade. March 1 marks the 90-day deadline by which the US and China must cement a comprehensive trade deal to prevent the next round of US tariffs kicking in.
Rising interest rates are weighing on everything from US home building to the Turkish lira. Barring a last-gasp deal, Britain looks set to be unceremoniously dumped out of the European Union (EU).
As for US President Donald Trump, the only safe prediction is that he will continue to face one legal battle after another. But the biggest danger of all may be the self-perpetuating cycle of risk aversion that former president Franklin Roosevelt famously called "fear itself".
"There is a growing risk of reverse causation where 'bad markets create bad fundamentals,'" said strategists at Bank of America (BofA) Merrill Lynch Global Research, in a note to clients. "The problem is that the economy can handle a short period of high policy uncertainty and market volatility, but patience has its limits."
Generally, economic activity is thought to drive corporate growth, which, in turn, drives stock prices. But major stock-market declines can shake consumer confidence, and that can have a big impact on consumer-driven economies like the US.
How different things were just 12 months ago. As 2018 began, US markets were in a state of euphoria. A decade of record low interest rates had encouraged investors to abandon Treasury markets and savings accounts in favour of "risk" assets, driving up the prices of everything from oil to biotech stocks.
The ultimate sign of euphoria was bitcoin's meteoric rise to hit the US$20,000 mark.
As 2019 looms large, things could hardly be more different. A single bitcoin recently changed hands for just US$3,400.
"The bull market in everything under the extended quantitative easing regime is now giving way to an environment characterised by tighter monetary conditions and a process of price resetting," said Philip Saunders, co-head of multi-asset growth at Investec Asset Management. "Global growth has peaked and is decelerating."
Trump and trade
US economic growth is likely to slow unless global trade activity picks up, according to most strategists.
For much of 2018, the bulls' refrain was that the US economy and markets were "decoupling" from those in the rest of the world. While global growth decelerated, the rate of gross-domestic product growth accelerated in the US.
Even though the Dow Jones Industrial Average finished the year in correction territory - with peak-to-trough losses of around 10 per cent - it never entered bear-market territory as the German and Chinese indexes did.
Unfortunately for the bulls, America can be "first" for only so long. The multinational corporations that represent the bulk of the Standard & Poor's 500 - everything from Coca-Cola to Intel - generate a significant portion of their revenue overseas.
Even the companies that only sell products in the US import components from China and elsewhere. Many retailers and consumer products companies are already warning of rising costs because of steel and aluminium tariffs.
That's one reason General Motors said it was shutting down several plants in North America. So far, tariffs are relatively limited, with a 10 per cent toll on roughly half the imports coming into the US from China.
The knock-on effects of the proposed March increase to 25 per cent on all Chinese imports would likely ripple through every sector of the stock market.
And then there's the "boy- who-cried-wolf" effect.
For much of 2018, US stocks rallied when Mr Trump hinted that a deal with China was close, only for those rallies to be wiped out when the deal didn't materialise.
According to one money manager, the stock market will likely ignore rhetoric on trade until a concrete deal is produced. "Trump is so unreliable," said Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund.
After concessions from Beijing, it now appears likely that the Trump administration will agree to some kind of trade-peace pact with China.
Yet on the central front of the trade war - the struggle over where the centre of global technology industry will be - bombardment will likely continue from both sides.
In the fourth quarter of 2017, shares of Apple underwent one of its biggest retreats since the death of its visionary leader Steve Jobs, as it was caught in the clash between Washington and Beijing over who powers the devices in the hands of the world's masses.
The Trump administration has treated Apple's main Chinese rival Huawei Technologies as a national-security threat, attacking the company with all the weapons at its disposal.
Tit for tat
The Chinese government is demanding that the US withdraw the arrest warrant of Huawei chief financial officer Meng Wanzhou, who has been accused of being personally involved in tricking banks into violating US sanctions on Iran.
Investors fear this could cause Apple to face economic reprisals in China. Indeed, Beijing has already banned the sale of older iPhone models, pushing the Silicon Valley giant to settle a patent dispute with chip designer Qualcomm.
Even if there is a broad trade deal between the two largest economies, global growth looks set to decelerate.
The International Monetary Fund (IMF) forecasts a modest slowdown from this year's rate, and has warned that recent bond-market volatility could metastasise into a full-scale financial crisis.
If a financial crisis develops, it's likely to start in Europe.
March is the deadline for a final settlement of the terms of the UK's divorce from the EU. Brexit has devolved into something between a Restoration comedy of manners and a Monty Python sketch, with Prime Minister Theresa May unable to make a single promise to EU leaders without sparking fierce objections from her own government.
Should Britain exit the EU without securing any access to the common market, the pound could go into freefall, and in turn rock the British, and, possibly, the entire global banking system.
If Brexit were not enough, the risk of "Quitaly" also looms next year, according to BofA Merrill Lynch economists. Italy's government has stopped short of vowing to leave the EU, but remains at loggerheads with Brussels regulators over the extent of its budget deficit.
As the Greek crisis some years ago illustrated, crises in the euro zone are quickly communicated to the US because of the European businesses and bond holdings of major US banks and investment firms.
Already, banking executives have reportedly held London meetings to plan a way to inoculate the global financial system from Brexit contagion.
If the US stock market levels off, the Federal Reserve will likely return to the course from which it recently wavered: an aggressive cycle of rate hikes.
In the past, as Mr Trump has frequently noted, the Fed's hikes have tended to slow economic growth, sometimes to the point of recession. A slight increase in mortgage rates has been enough to slow home-sales activity and home-price growth in many US regions.
Investors should keep an eye on a handful of economic indicators to see if odds of a recession are rising, according to BofA Merrill Lynch economists. These include employment data, including new jobless claims, which typically rise steadily in advance of a recession, and gauges of manufacturing activity.
Even if the Fed manages to hike rates without causing a recession, it seems unlikely that the performance of the US economy and earnings in 2018 can be topped.
Corporations this year received a two-fold lift from Mr Trump's tax cuts: consumers felt wealthier, thanks to the cuts, and net profits were higher, due to tax accounting. Those benefits will evaporate in 2019.
"To quote the Old Milwaukee beer commercial of years past, 'It just doesn't get any better than this,'" said Sam Stovall, chief investment strategist at research firm CFRA. "Indeed, a tailing off of the trend is the theme for 2019, as global GDP growth, along with S&P 500 earnings, face stiffer comparisons."
Next year, investors will find out whether the US is beating to the march of its own drum, or if the US tax cuts were merely masking the impact of the global slowdown.