Stocks, bonds bull market may 'wind down' in 2019: BoFAML

The long bull market cycle of excess stock and bond returns is expected to finally "wind down next year, but not before one last hurrah,” according to Bank of America Merrill Lynch (BofAML) Global Research.

The bear market vibe at the end of 2018 is expected to continue, with asset prices finding their lows in the first half of 2019 once rate expectations peak and global earnings expectations trough, the bank said in its outlook for the global markets and economy in 2019.

However, BofAML also forecasts a record high peak in earnings for the S&P 500 next year and plenty of upside potential for investors who make volatility their new best friend.

 “In our view, the current weakness in the markets is not a reflection of poor fundamentals. Rather, it’s caused by a confluence of idiosyncratic shocks that create very real risks for investors to be concerned about but also opportunities for vigilant, well-positioned investors to pursue,” said Candace Browning, head of BofAML Global Research.

For the year ahead, the report forecasts modest gains in equities and credit, a weaker dollar, widening credit spreads, and a flattening to inverted yield curve, signaling a tighter squeeze on liquidity that calls for higher levels of volatility. This comes against a backdrop of slowing, but still-healthy economic growth; mild inflation, except in the US where inflationary pressures are building; and a notable slowing in global earnings per share growth from the torrid pace of 2017 and 2018.

The two big themes that are expected to affect asset returns and the pace of economic growth next year are an unprecedented level of global monetary policy divergence as the US Federal Reserve continues to hike interest rates and other major central banks don’t and whether a strong US economy decoupled from the rest of the world, particularly Europe and China, can be sustained.

The answer to that question could depend on big wild card risks in 2019: resolution of the trade war between China and the US, an EU political/economic crisis, and political gridlock in the US that could slow capital investments and deteriorate investor sentiment, the report noted.