A July Overview
The markets have started to come out of this six-month corrective phase and, as of this writing, we are only a few percentage points away from new highs. In our view, 2018 is unfolding much like a performer walking a tightrope. Risk is heightened, but manageable, and best addressed by agility and focus. That said, there are themes that continue to dominate this economy and we are keeping a raised eyebrow to each of them.
Growth - Global growth should remain solid as the synchronized expansion continues, but the pace is likely to moderate amid tightening monetary policy and financial conditions. Overall, the average growth rate of earnings for companies in the S&P 500 was 21% over the same quarter last year.
Inflation - A likely source of volatility, inflation remains highly regional, with US readings gradually firming, Europe subdued, and emerging markets mixed, but Chinese inflation likely to rise.
Politics - US fiscal expansion may lower recession risk in the near-term, but emerging tariff rhetoric and the potential for targeted retaliation introduce new systemic risk. The biggest question is whether all the global tariff talk is just bantering for position or the catalyst for an actual trade war.
Monetary Policy - In 2018, we expect four rate hikes by the FED, two by the Bank of England, the end of quantitative easing by the European Central Bank, and the Bank of Japan still to be on hold. So, the global trend for rates is higher.