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January 2019


Macro & Market Views


Economic Growth

We believe global growth is poised to slow moderately from 3.8% to 3.5%, led by deceleration in the US (due to tighter financial conditions, fading fiscal stimulus) and further softening in China. Softer growth, though, still remains above trend. Neither overheating risks nor financial imbalances look worrisome. For now, a US recession in 2019 or 2020 looks unlikely.


Relative tightness in labor markets confirms that the US is further advanced in the economic cycle, increasingly translating into higher wages and prices. Both Europe and Japan are also seeing labor market progress, a trend we expect to continue in 2019.


The labor market recovery should reinforce the recent uptick trend in global inflation, with US core inflation averaging 2¼ in 2019. In both Europe and Japan, inflation is firming, but remains far away from central-bank goals, indicative of remaining slack in parts of Europe and still-depressed inflation expectations in Japan.

Monetary Policy

Slowing growth (although above potential), and firming inflation (although at or below target) should motivate most G10 central banks to gradually remove accommodation. We expect two US rate hikes and one in Europe, though European Central Bank timing (Q3) could be influenced by the Brexit and Italian developments.


Global (geo-)political uncertainties are likely to be important drivers of both returns and volatility, as the market adjusts to trade uncertainties, spillovers from Brexit and Italian risks, and the potentially disruptive consequences of populism.


We expect positive equity returns across all regions for 2019. Underlying this view is a slowdown in earnings growth, higher rates, and tighter financial conditions. We suggest a focus on strong balance sheets and a quality bias. Slowing earnings growth is likely to favor high-conviction growth companies, though the headwinds to value leadership have clearly diminished.


Yields should move higher and curves grow flatter across all G10 markets. The 2-10 US spread may invert by late 2019, though very low term premia suggest caution in inferring macro forecasts exclusively from curve shape.


We believe improving corporate fundamentals, muted credit spreads, and low recession risk make high yield (HY) more attractive than investment grade (IG). While IG is better positioned, in our view, to weather evolving margin pressures in non-financial sectors, HY should benefit from supply decline relative to IG in 2019.


We expect dollar declines in 2019 as the US growth boom “catches down” to the moderate pace of expansion in the rest of the world. The euro should appreciate once Italian risk subsides.


We believe 2019 will continue the trend established in 2018: relatively trend-like average volatility, but episodic super-spikes that reflect policy uncertainty and structural market fragility.

Catching Down

US equities have outperformed a well-diversified investment approach by a wide margin for the last several years. This trend was reinforced in 2018 as the policy-fueled acceleration in US economic growth, earnings, and interest rates culminated with broad US dollar strength. The capital market result was a powerful episode of US exceptionalism that may be drawing to a close. We call it “catching down,” where rather than the rest of the world catching up to the US, we think the US in 2019 will decelerate and global differentials should narrow. Consequently, as the US catches down with the rest of the world, the strategic benefits of global asset class diversification will once again be revealed.

Source: Bloomberg and GSAM. As of December 31, 2018. For illustrative purposes only. Bank Loans refers to the Credit Suisse Leveraged Loan Index. Commodities refers to the S&P GSCI Commodity Index. Emerging Market Debt refers to the JPM EMBI Global Composite Index. Emerging Market Equity refers to the MSCI Emerging Markets Index. Hedge Funds refers to the HFRI Fund of Funds Index. High Yield refers to the Bloomberg Barclays Global High Yield Index. International Equity refers to MSCI EAFE Index. International Real Estate refers to the S&P Developed ex-US Property Index. International Small Cap refers to the S&P Developed ex-US Small Cap Index. US Aggregate Bonds refers to the Bloomberg Barclays Aggregate Bond Index. US Large Cap refers to the S&P 500 Index. US Real Estate refers to the Dow Jones US Select Real Estate Securities Index. US Small Cap refers to the Russell 2000 Index. Diversification does not protect an investor from market risk and does not ensure a profit. Past performance does not guarantee future results, which may vary.

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