Industry Voice Sponsored by T.Rowe Price: With market volatility likely to persist and the US dollar potentially near a peak, prudent investors may want to position their portfolios to take advantage of assets that have historically performed well late in the cycle.
The story for 2018 was of a buoyant US economy and a stronger dollar, but current projections show this growth momentum is expected to decelerate in the coming year. This is part of a global trend of slower economic growth across the developed markets and in China in 2019.
By contrast, growth in emerging markets (EM) is expected to remain stable, with the slowdown in China offset by recoveries in some other major EM economies.
Given that the US is furthest along in its economic cycle, we believe the risks to growth are tilted to the downside. Nevertheless, a healthy private sector, strong consumer demand and the lingering effects of the 2017 tax cut stimulus should continue to sustain the expansion through the first half of the year.
The odds of a downturn appear above average given where we are in the economic cycle, but we believe a global recession is still a relatively low risk in 2019.
Has the US dollar reached a peak?
During the first 10 months of 2018, faster US growth and rising interest rates helped lift the dollar by more than 8% on a broad trade-weighted basis.
We believe the path of economic growth will likely determine the dollar's course in 2019. If financial markets think US growth is slowing down, they are more likely to believe the Fed is nearing the end of—or at least a pause in—its monetary tightening programme, causing the dollar to weaken. Moreover, stronger growth in the rest of the world could also weaken the dollar.
However, if the US economy remains on a strong growth path, the dollar could continue to strengthen.
How should investors navigate the later stages of the cycle? Read more.