While the sharp drawdown in global risk assets in the fourth quarter of 2018 stands in stark contrast to their placid uptrends in 2017, there is still something familiar in recent price action. In several ways, market behavior late in 2018 and to start 2019 resembles that of late 2015/early 2016. Drawdowns across global equity indexes in 2018 have generally been more severe than those of three years ago, while the rise in credit spreads and decline in Treasury yields have been roughly half those in the prior period. A sharp decline in oil prices, driven by both supply and demand factors, has been a common element that has fed into weakness in the prices of risk assets. Arguably, the underlying concerns among investors in these two periods are similar as well—fears of a Fed policy mistake amid slowing global growth.
The global economy is in better shape this time around and equity valuations are more attractive, but tighter policy and geopolitical tensions are headwinds. Three years ago, a one-two punch of a less hawkish Fed and China stimulus catalyzed a quick rebound in risk assets toward their highs. We expect policymakers on both sides of the Pacific to once again provide support for risk assets in 2019, but policy constraints may limit the effectiveness compared to 2015/16.