Investment Advisory Team
At a time of North Korean nuclear threats, regular terrorist attacks, and intense political polarization, it seems somewhat difficult to say things are back to normal.However, from an economic standpoint conditions are much improved and are more normal today than they have been in many years. In fact, the world economy appears to have finally gotten back on its feet after being hampered by a series of rolling crises that began with the global financial crisis in 2008 and continued for nearly a decade. The economic expansion has broadened with all of the major regions of the world (U.S., Europe, Japan & Developed Asia, & Emerging Markets) showing positive and improving growth conditions. So despite the economic expansion being an unusually long 8+ years, fundamentals are probably healthier than they have been at any point in the expansion thus far.
Helping the world economy get back on its feet have been extraordinary policies from central banks that have kept the cost of money low (interest rates) and facilitated the availability of credit. A low inflationary environment has given central banks flexibility, allowing policy to remain accommodative longer than many had anticipated. Fiscal policies have also beenincreasingly helpful as the drive for austerity and tight budgets has given way to increased spending and lower tax rates. More fiscal stimulus may be on the way in the U.S. as policymakers debate the structure of tax reform.
Stronger fundamentals and policy accommodation have not gone unnoticed by the global financial markets. With better global growth conditions, more markets worldwide have participated in the market advance in 2016 and 2017, rewarding diversification efforts of prudent investors. This runs counter to the risk aversion and narrow market advance seen in previous years which were dominated by a small group of U.S. growth stocks, low volatility stocks, and bond surrogates. We believe the unusually narrow leadership experienced was more of an aberration than a sustainable trend and reinforces the cyclicality inherent in world markets. Those investors not swayed from long-term strategies and diversification efforts are being rewarded today.
Looking ahead, we believe conditions continue to look favorable heading into 2018. Most severe market downturns are associated with recessions and there are few signs one is on the horizon. This suggests asset prices likely have further to run. We also do not see major excesses like those that were prevalent in the last two downturns a technology bubble in 2000 and real estate/credit bubble in 2008. The markets appear to have coalesced around the notion of secular stagnation, an environment of limited growth potential and low interest rates for as long as the eyes can see. We believe a regime change is afoot that will be very different from the low growth and risk averse environment supported by extreme monetary policies seen in recent years.
Geopolitical risks aside, the remainder of this cycle could be more normal with better growth conditions leading to further employment gains and eventually wage and inflation pressures. This, in turn, could push the Federal Reserve into a corner,leading to more interest rate increases. In an environment of elevated stock and bond valuations, interest rate pressure would not bode well for areas leading the markets in recent years such as the FANGS, longer-term bonds, and safe yield areas like utilities and consumer staples which have been beneficiaries of persistent investor cautiousness and the global search for yield. Areas that etc.) are likely the best bets for the years ahead. In the pages that follow, we delve into these topics and provide more detail on the investment opportunities and risks we see in today’s landscape.
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