In the first few months of this year, share prices literally skyrocketed on financial markets. But as headwinds pick up, this trend is unlikely to continue unimpeded.
For almost all asset classes, 2018 was not a good year. But the complete reverse is now the case in the first months of 2019, with virtually all asset classes staging a positive performance since the beginning of the year. The good performance of equity markets in particular highlights the extent to which the price losses in 2018 were overstated. In fact the growth expectations have actually deteriorated over the course of 2019 so far, and the political risks have not improved much either. On the other hand, uplift has come once again from the central banks: the US Federal Reserve ended its cycle of interest rate hikes, and the ECB dashed any expectations of interest rates rising in the near future.
It goes without saying that the good performance of the first weeks cannot simply be continued. If, however, the British government is able to avoid an unregulated Brexit and the trade conflict between the USA and China is resolved, a positive development on stock markets can at least be expected in the next few weeks. This compares with developments on bond markets which remain largely dependent on central bank policy: as long as global underlying interest rates remain low, no significant setbacks are likely here.
In the second half of the year, however, equity markets might run out of reasons to justify a further rise in share prices. By then, the valuation will probably have returned to a level that is warranted by the growth outlook, with further stimulus from central banks remaining very limited due to the lack of opportunities.