The outlook for financial markets in 2008 is not encouraging. Although the past five years have seen the strongest global economy since the late 1960s, the expansion has now reached the cyclical juncture at which market returns are typically very weak or negative.

The US economy is leading the way, having already entered a stagflationary phase. Such an environment is poisonous for financial assets. Since 1929, the average real return from US equities, bonds and bills has been markedly negative during years of below trend growth and above trend inflation. Equities, by way of example, average a negative 1.9 per cent real return during such years.