As the new year begins to unfold, the environment for risk assets is still benign: the global economy is strong, monetary policy is accommodative, and volatility is low and steady. At this point, we don’t see excesses developing that could change that.

Global Growth Is Improving

The global economy appears to be hitting its stride, and the impressive performance is broad-based. During 2017, the Purchasing Managers’ Index, a gauge of the manufacturing sector’s overall health, signaled expansion in at least 75% of a sample of 12 large developed and emerging economies (Display).

Monetary policy is providing support, too: even though the Fed is starting to shrink the size of its balance sheet, monetary policy is still accommodative globally. And yields are low, but so is inflation.

Some investors worry that the flatter shape of the US yield curve today may point to slower growth, but in our view, the shape is more likely a result of quantitative-easing dynamics than a signal of recession. The economic cycle may be maturing, but it isn’t coming to an end.

As for US tax reform, we don’t have grand visions of what the new rules will do. But they should be incrementally positive, given the sound macro backdrop. Our bigger concern? A possible pickup in inflation, with tax reform likely to add to the pressure. If policymakers are forced to tighten financial conditions faster than markets expect, we could see a technically driven market sell-off.