During the first quarter, volatility returned to the markets in dramatic fashion. Despite generally positive economic data and healthy corporate fundamentals, markets gyrated as investors confronted the likelihood of more Federal Reserve hikes and rising inflation. The shifting terrain may be jarring for some, but the conditions we are seeing today are more normal than recent years, when investors grew accustomed to record low interest rates, a near-absence of inflation and the subdued volatility. As a more typical environment emerges, our positioning reflects the following beliefs:
- Coordinated global economic expansion will continue through 2018, although improvements in some economic fundamentals may have peaked. The pace of growth among economies will likely be more varied than in 2017.
- The near-term risk of a U.S. recession is very low. Inflation and short-term interest rates will rise but are unlikely to soar out of control in 2018.
- The bull market has more room to run, supported by positive economic conditions and corporate fundamentals. Volatility is unlikely to return to unusually low levels, however.
- In advancing but choppy markets, opportunities increase for active and risk-aware approaches.
Evolving trade policies, uncertainties around North Korea, Russia and Syria, and U.S. mid-term elections will fuel short-term market disruptions over these next months. Fears of a trade war have risen in the markets, but we believe Washington’s recent moves can set the stage for negotiations that lead to freer and fairer trade over the long term.
We see very low risk of an imminent U.S. recession. GDP growth has continued at a good clip in the U.S., and tax reform and deregulation can provide further catalysts from here. With tighter labor markets and increased incentives to make capital expenditures, we expect U.S. businesses to re-invest in their businesses at higher rates than recent years. While we are monitoring a falling savings rate as a potential signpost of weakness, the U.S. consumer looks to be in good shape overall, benefiting from job growth, wage gains and rising housing values.