A March Overview
The markets have continued higher through the first couple months of the year, as global economic data sets continue to impress. At some point, maybe soon, the markets need to take a breather. But, to this point in the year, there has not been a catalyst for a pullback. Intuitively, we thought the Federal Reserve’s recent rise in interest rates would cause investors to pause. However, Fed Chair Jane Yellen’s comments were dovish and this kept investors on the buy side. Unlike many rallies we have seen in the past couple years, this one is being driven by strong economic improvement. A few points:
- In February, the global composite PMI (manufacturing) remained close to a three-year high and consistent with world GDP growth of around 3½%.
- Headline inflation has rebounded sharply over the past couple of months, reaching the Central Bank’s target in the Euro-Zone and exceeding it in the US. However, underlying inflation remains very low almost everywhere, suggesting that policymakers will persist with exceptionally accommodative monetary policy for a long time yet.
- Monetary indicators reveal that bank lending is growing at a steady pace in all the major advanced economies.
- World GDP growth accelerated to around 3½% on an annualized basis in the second half of last year. This is partly due to stronger growth in China, but aggregate growth elsewhere also picked up.
Unlike we have seen in the past four or five years, this global economy appears to be gaining a lot of traction. There will certainly be potholes along the way. For example, the Federal Reserve will most likely raise rates three times this year. But, we believe any correction in this time frame would be healthy and lead to further upside by year-end.