MARKETS soared at the start of this year and all the disappointment served up at the end of 2018 was forgotten. While investors still carry some scars from the pernicious and painful decline we saw at the end of last year, which very few were expecting or positioned for, the tale of the tape in 2019 has been unbridled optimism that all is going to be okay.

However, after such a powerful start to the year for risk assets investors should take pause and evaluate for themselves whether we are in a ‘green for go’ situation for financial markets or whether a turning point is again upon us.

The last few weeks have seen a breakdown in the parabolic move higher that we have enjoyed in equity and corporate bond indices since Christmas. This current pause and pullback is long overdue and we should all think hard about the factors that have driven this short-term reassessment in markets.

Assessing the short- and medium-term drivers of markets has become much more challenging in recent years, as the last year has shown us. In my mind this is down to the fact there has been a huge switch in the way markets behave over the last few decades. When I first started investing the preeminent driver of financial assets was the economy at a macro level and then individual investments were driven by how well a company or an asset was doing. Next in importance came central banks and their actions. Thirdly, one had to consider technical elements and what other investors were doing.

This has now been flipped over in a world of increased participation in markets by computers and algorithmic trading, a growing use of unsentimental passive instruments, reduced market liquidity created by often counterproductive regulations, the la-la-land world created by the free money of central banks, the growing influence of politicians on markets - best shown by Donald Trump’s use of the stock market as a popularity gauge - and the never-ending noise brought about by 24-hour financial news on television.

I would argue that it is technical factors and positioning that matter most, followed by how fast or slow central bankers are pumping money into the financial system and then economic fundamentals limp in a distant third in terms of investor importance.

But maybe an inflection point has now arisen in markets as investors start to fret that the trade war between the US and China are not some political bluff. Tariffs and hurdles to free trade matter whenever they arise, but it is not a good sign for risk assets that they are now appearing at a time of slowing economic growth, contracting global trade and a pervasive slump in manufacturing. This trade wars might well be partially resolved in the coming months, but investors would do well to recognise that Pandora’s Box has been opened and the last three decades of intense globalisation and the mutually beneficial ‘Chimerica’ relationship has taken a negative, but unsurprising, turn towards economic warfare. This could lead to rising prices, an uncertain economic environment for companies to invest in and a hit to global corporate profits.

So what should investors do in this situation? Tread carefully, would be my advice. Focus on investments and themes that have positive long-term structural growth drivers that are not as reliant on the whims of global trade flows. Focus on domestic champions that could benefit from more inward-looking government policies. Be diversified in your investment approach and don’t put all your eggs in one basket. Recognise that the easy environment of the last decade or so is now behind us.

Finally, be sure to hold some diversifiers in your portfolio so that if there is a return to the market environment of late 2018 you do not suffer the same sort of falls that set the alarm bells ringing last Christmas, rattling investors’ nerves around the world in the process.

Thomas Becket is chief investment officer at Psigma Investment Management.