Stronger growth in Europe and Asia are positive signs for the global economy. Global growth has become more synchronized, with fewer economies in recession in 2017 than at any point in nearly a decade – a trend that is projected to continue. The synchronized global growth backdrop is supporting the current expansion, and could do so for some time.
Source: PMFA, International Monetary Fund (IMF)
Actual and estimated GDP data is per IMF World Economic Outlook Database, October 2017.
Investors remain skeptical of the ability or need for policymakers to raise rates even at that relatively measured projected pace. While the Fed forecast calls for as many as four hikes in 2018, markets are pricing in a 70% probability of no more than two. Absent any meaningful surprises on the economic front (either positive or negative), investors should expect the gradual pace of monetary tightening to continue.
Source: PMFA, Federal Reserve
While estimates vary, most economists expect the recently passed tax bill to provide a modest boost to growth in 2018, with that benefit gradually fading over the next several years. If accurate, growth could be boosted by 0.5 percent or more in 2018, which could lift GDP growth to 3 percent or more, all else being equal.
The bill slashed the highest corporate tax rate from 35 percent to 21 percent. Although the reduction in the effective rate for most companies will be much less, it will provide a tailwind for profits, with smaller companies, on average, likely benefiting more.
What is not accounted for above is the long-term impact on the federal deficit, which will almost certainly increase in the years ahead.
We believe that the investor anxiety over rising rates may be a bit overblown, they shouldn’t lose sight of credit risk given the tightness of spreads. Rising rates can weigh on bond performance over shorter periods, but long-term investors would benefit from higher yields.
Source: PMFA, PIMCO, Standish
The chart provides a hypothetical example of a taxable fixed income portfolio and the changes in performance from a 1% increase in year 1 or no increase in interest rates. Actual performance may be materially different than what is illustrated above.
The simple fact that the bull market is lengthy doesn’t mean it can’t continue. Corporate earnings may be the lynchpin to equity returns from here. A stronger economy should support top-line growth globally, while U.S. corporations should also see a benefit to their bottom line, enhanced by lower effective tax rates.
Source: PMFA, Standard & Poor’s
Each cycle is different, but historically, periods of relative outperformance between domestic and foreign equity markets have tended to extend over a period of several years.
The combination of comparatively attractive valuations, improving economic conditions globally, and the cyclical nature of markets appear to still position international equities well going forward.
Source: PMFA, MSCI
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