KEY THEMES FROM OUR 2019 CAPITAL MARKETS FORECAST The last ten years in capital markets have been anomalous in many ways. Gains in global equities have exceeded the gains in the worldwide economy, as measured by gross domestic product (GDP), since the onset of the bull market almost ten years ago. To some degree, this is an unfair comparison; it is often the case that returns in equity bull markets outpace GDP and wage growth since investors are willing to pay more for an earnings stream when growth prospects are more optimistic, a phenomenon known as equity multiple expansion. However, multiple expansion has been even more pronounced during this recovery. Equally as anomalous, market performance has substantially rewarded one asset class: U.S. equities. What this may mean going forward is the subject of a deeper discussion later in this piece, but suffice it to say when diversification fails investors over a large swath of time, it is atypical. Early last year, we projected volatility to increase in 2018, coming off a strong 2017 which featured the lowest volatility on record for the MSCI All Country World Index (ACWI) and the second-lowest volatility in the past 100 years for the S&P 500 index. This turned out to be a prescient call. Volatility of 15.3% and 13.5% in 2018 represent the largest standard deviation in the S&P 500 and MSCI ACWI, respectively, since 2011. The choppiness has rattled investors, if for no other reason than instability following a period of abnormally low volatility typically feels more unsettling. This is evidenced by weakness during 2018 in almost all assets outside of cash, a mirror image of the strong results in 2017 (Figure 1). The silver lining to a year like 2018 is the performance of the economy exceeding the gains of the equity markets. While this may serve as a painful adjustment in the short-term, it has historically proven to be a necessary breather for longer-term health in the equity markets. All of this begs the question of where to from here, for both the economy and the markets. To answer that we need to assess: 1) from where have we come, 2) where are we now, and 3) where are we going? Per our investment process, our goal is to understand what we are seeing in the context of historical data and to use this information to assess the likelihood of what will come next. There are compelling quantitative and qualitative reasons to argue the economy, and thus the stock market,
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