Between trade wars, Brexit, rising US interest rates, and turmoil in emerging markets, there has been no shortage of things for investors to fret about in 2018. It's no surprise then that following a benign trading environment in 2017, volatility returned to the markets in 2018.
Last January, global equity markets got off to an enthusiastic start, feeding off the tax-cut stimulus of US President Donald Trump and the continued strong run of synchronized global growth. This ended abruptly at the beginning of February, with falls in excess of 10pc experienced across equity markets. It took seven months for the US stock market to return to its January 2018 high. European stock markets have yet to do so, instead remaining near their lowest levels of the year. Emerging market equities have fallen into a bear market. America First has certainly helped the US stock market.
This year saw the return of protectionism - led by Trump. This protectionism has raised the spectre of a global trade war. In November 2008, in the midst of the financial crisis, the G20 met in Washington DC and made a commitment to an open global economy. It was refreshing at the time to see our political leaders commit to avoiding the same mistakes that their predecessors had made in the 1930s by imposing trade tariffs and engaging in populous protectionist policies. It was the Irish political philosopher Edmund Burke who said that those who don't know history are doomed to repeat it. Are we about to repeat the mistakes of the 1930s?
In fairness to Trump, it is most likely that the tariffs he has imposed are all part of an elaborate negotiating game he is playing with his major counterparts, but it could backfire. The possibility of an all-out trade war, despite the recent G20 optimism, is probably the biggest risk for investors as we go into the New Year.
Movements in US interest rates always have the ability to impact stock markets and this was notable in late November, when the US Federal Reserve chairman Jerome Powell indicated that US interest rates were close to neutral (that is, almost at a level that neither brakes nor boosts a healthy economy). Markets interpreted this as the Fed signalling that the interest rate-hiking cycle was near an end, leading to one of the strongest days of the year for the US stock market. The Fed famously raised interest rates in 1937 and sent the economy back into recession. Powell is clearly aware of history and hoping not to repeat another episode from the 1930s.
Brexit could cause some major dislocations in financial markets between now and the March deadline (when the UK is due to officially leave). Any fallout is likely to be temporary, providing there is a deal of some sort.
In conclusion, it has been a tough year for investors, with most markets looking likely to finish in negative territory. It has been the first year since 1972 where no asset class (equities, government and corporate bonds, bank deposits and gold) has delivered a 5pc return. Political risk will remain as we enter 2019 but the underlying economic situation doesn't look too bad. At a recent speech to The Economic Club of New York, Powell said that he and his colleagues are forecasting continued solid growth, low unemployment and stable inflation. However, markets, not central banks, are the best guide to the likely business conditions ahead, and markets remain in a downtrend until proven otherwise.