Get Ready for a New Year of Uncertainty
What a difference a year makes. Every January we publish a report analyzing top trends to monitor in the coming year. Last year, we noted the relative calm in short-term debt markets, a full-employment economy boosted by tax-cut legislation, and expectations that the Fed would continue its series of slow, steady and predictable rate hikes to keep inflation at bay.
But we also cautioned that “smooth sailing is no excuse for complacency.” In fact, we said the X-factor of “event risk” might be the most important trend to monitor in the coming year. Sure enough, we closed out 2018 with a government shutdown, the stock market in free-fall, a simmering trade war, a flattening yield curve, talk of a possible recession, and reports the President was asking if he had the power to fire the Fed chairman. Plenty of events, plenty of risk.
That’s why this year’s outlook report—The Curve, Trade, and Brexit – Three Themes to Watch in 2019—is must reading for institutional cash managers:
- A flattening yield curve with a narrowing gap between short-term and longer-term rates has always been a reliable predictor of an impending economic slowdown. If the curve continues to flatten or invert in 2019, cash managers may need to rethink portfolio duration and monitor securities that could be impacted most by a slowdown or recession.
- The prospect of a broader trade war may increase the risk of a global economic slowdown. And its sharpest and most immediate impacts could be on the industries where new tariffs come into play. Cash managers should carefully monitor counterparty risk in the sectors where the war is being fought.
- Brexit may be the biggest X factor of all for 2019, given the seemingly intractable impasse in negotiations over how to minimize disruptions that will be caused by the UK’s exit from the European Union.
We’re still heading into 2019 with decent economic growth, extremely low unemployment, and low inflation. There’s time to position portfolios for heightened volatility and risk in the coming year. But all the risks covered in our outlook report are interrelated. And they’re cropping up in ways we haven’t experienced in the decade since the financial crisis.
So corporate cash managers need to get ready for possible shocks to market liquidity. It’s time to start reviewing portfolios to establish appropriate risk diversification and liquidity stratification. Downloading The Curve, Trade, and Brexit – Three Themes to Watch in 2019 may be a great way to start.