The following are excerpts from the Q3 “Investment Insights” report, produced by the Global Investment Management team. Read the full report.
Market bulls on parade
Economic data over the past few years had been fairly positive, but mixed. Whether it was an issue with below-trend growth, inflation, or productivity, there always seemed to be a blend of negative news as well. The third quarter marked a new breakthrough for the global synchronized recovery as data showed expansion in many important economic indicators. Bloomberg showed data released during the period revealed strong U.S. factory orders, a 13-year high in the ISM Manufacturing Index, employment at or near full capacity, and increased labor force participation. Wage growth also finally reached the milestone of pre-Great Recession levels in recent data. The stats may be adding up to a strong quarter for growth as retail sales rebounded in September, according to Bank of the West Economics, which also forecasts consumer spending rebounding strongly in the fourth quarter. Their most recent estimates indicate real GDP growth of 2.5% in the third quarter and 2.8% in the fourth quarter for 2017.
The synchronization of the recovery rung true as countries abroad also felt the recent surge in positive economic news. That optimism was reflected in new forecasts for global growth by the International Monetary Fund. In its latest World Economic Outlook, the organization increased their projections for global GDP growth to 3.6% and 3.7% in 2017 and 2018, respectively. The report highlighted improvements in the Eurozone, Japan, and certain emerging market countries, while downgrading growth estimates for the U.S. and U.K. due to political and policy uncertainties. According to composite indices created jointly by the Brookings Institution and the Financial Times that track the global economic recovery, the world has reached its best financial and economic condition since 2012 in both advanced and emerging economies. While global growth seems to be kicking into high gear and financial markets appear unstoppable, it’s important that investors keep in mind that risks are still prevalent.
Risk and reward with the Fed
The Federal Reserve and its governors have been in the headlines as officials set unprecedented plans for monetary policy while trying to grapple with politics. Fed Chair Janet Yellen had announced the beginning of “quantitative tightening,” or the process of unwinding its $4.5 trillion in asset purchases made during periods of quantitative easing. While bond markets finally reacted with higher rates, that move may be more attributable to developments on the economic side. Fed officials have gone on a media frenzy in an attempt to soothe markets and emphasize the gradual pace of the normalization. While bond markets may have come to terms and priced the unwinding in, the jury is still out on how exactly the plan will influence the markets and the economy going forward. However, the pace of tightening by both the Fed and by foreign central banks may be a mounting risk.
Where we are
The environment investors find themselves in today should be considered fairly unique, to say the least. The Global Investment Management team continues to believe geopolitical risk has become outsized compared to previous years, yet markets have appeared to ignore some of those threats. A mix of uncertainty from monetary and fiscal policies domestically as well as a decrease in the structural security of areas like the Eurozone have created a precarious situation in geopolitics. Financial risks persist as valuations in certain sectors and regions have risen to elevated levels; the S&P 500 Index price-earnings ratio has climbed to almost 19.5 compared to its 10-year average of around 15.4 with similar results for global markets. However, justification of these price levels is a difficult argument. Economic growth rates continue to be below-trend for many advanced economies despite the stronger potential over the near-term.
Read more of the Q3 “Investment Insights” report.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
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