There are two certainties in economics. The first is that economic cycles exist: recessions eventually happen. The second is that economists are terrible at forecasting them. A recent study found that the IMF was able to forecast 5 out of nearly 470 past economic downturns.

In early December we argued that despite the increase in earnings, and the move in equity prices, the attractiveness of the equity market was somewhat ambiguous. While the earnings yield of equities increased through most of 2018, so did the return on cash, leaving the difference between the two virtually unchanged.

At the start of 2018, we argued that while the economic outlook was strong, the certainty of rising short-term interest rates will have implications for the relative valuation of all asset classes. This implied that for equity markets, P/E multiples will need to fall, and consequently price returns will be less than earnings growth. For fixed income markets, this implied that long duration bonds will perform poorly, but credit spreads are likely to remain stable.