When we summed up 2017, the verdict was that it was an unusually stable year, economically and market-wise. The first half of 2018 has brought more movement in the market and, in pace with less expansive monetary policy, the risks of a backlash in the world economy and the finance market are rising. For the market, the single-most important question is when will the next recession arrive.
Economic cycles have always existed and it is a safe bet this will also be the case in the future. Explanations of economic cycles are myriad and the truth is that every cycle is different. As writer – and market speculator - Mark Twain put it: "History doesn't repeat itself, but it often rhymes."
The starting position is different today, in the wake of the deepest recession since the Great Depression of the 1930s. In addition, monetary policy has never before been as expansive as in recent years. One consequence of pursuing overly expansive monetary policy, for a long time, is that debt ultimately becomes unsustainably high. Lower costs of financing encourage governments, companies and – especially – individuals to borrow for both investments and consumption. The likelihood of a financial crisis rises swiftly if returns on the investments and/or increases in disposable income are too low and borrowers cannot repay their debts.
It is worth remembering that history rhymes. Of the last 15 global recessions, 13 were preceded by austere monetary policy. Today, nine years after the last economic cycle bottomed out, only the US Federal Reserve has tightened its monetary policy. Even though most pundits believe this will change in the second half of 2018, we still believe a recession is several years away.
Key factors that could change our assessment are inflation, where slightly higher inflation is to be desired, but not so high that central banks are forced to institute tougher austerity measures and a recession becomes more likely. A full-scale trade war will reduce world trade, leaving a smaller pie to share. This will impact more export-dependent countries, and Sweden is one of the most export-dependent in the world. Even though we are many years into a recovery, the US is pursuing an expansive fiscal policy, which is cause for concern. Doubts about the capacity of the US government to repay its loans will have unimagined consequences for interest rates and exchange rates alike.
When assessing the financial market, it is only natural to focus on the risks and what can go wrong. Nevertheless, it is important to remember that the most likely outcome is that growth will continue, unemployment will fall and corporate profits will rise. Although there are a few dark clouds in the sky, our judgement is that the economic climate and the investment climate are a safe distance away from a cold and bitter winter. But then again, as Mark Twain is reputed to have said, "Climate is what we expect, weather is what we get."