Quarterly Update

Steven Denike, Portfolio Strategy Analyst | Jan. 2019

Global Economic Outlook: Slowing, but Still Growing

Lengthy U.S. economic growth can continue

Key risks are interest rate, trade policy errors

Fears of recession in near future are unfounded

The high-water mark for economic growth is probably behind us. The synchronized global expansion that began roughly two years ago has peaked, giving way to slower and more divergent GDP among the world’s economies. Evidence is mounting that the global expansion has entered the later stage of the business cycle, where growth slows, inflation picks up, interest rates rise, and asset returns become more volatile. Still, gathering talk of recession appears premature.

U.S. economic momentum remains strong. Though we expect domestic GDP to slow gradually back to trend over the next year as financial conditions tighten and the impact of fiscal stimulus fades, healthy household balance sheets, robust job gains, and high confidence all remain important near-term tailwinds.

Policy mistakes on trade and interest rates are the major risks to the outlook. Uncertainty surrounding trade is weighing on overall economic activity and particularly on business investment, reducing some of the key expected benefits of corporate tax reform. Nevertheless, the impact of trade disputes by themselves on the U.S. economy should be manageable, given the strength in underlying fundamentals.

Far more important is the interest rate backdrop. Interest rates remain low by historical standards, but higher borrowing costs are already affecting rate-sensitive industries such as housing and automobiles. Importantly, after five consecutive quarterly hikes, the Fed has signaled that it is mindful of the risks of overtightening.

Overseas, there is even less appetite for tighter monetary policy. The ECB’s bond buying program has ended but the Euro economy remains sluggish, with inflation still well below target. Uncertainty over Brexit negotiations has halted rate hikes by The Bank of England. Meanwhile, faced with structural strains in Japan and slowing GDP in China, Asian central bankers seem likely to keep policy loose.

Recent nervousness about the sustainability of growth is understandable—no expansion lasts forever. Although the U.S. expansion is set to enter uncharted territory by becoming the longest on record this July, it is aging gracefully. We still see few signs of overheating in sectors of the economy that have heralded some recessions in the past, or the credit excesses that have preceded others. Indeed, there’s no reason late-cycle environments can’t last a long time if major policy mistakes are avoided.

Key Points

Lengthy U.S. economic growth can continue

Key risks are interest rate, trade policy errors

Fears of recession in near future are unfounded

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Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy, and market risk. Investors in MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Income Tax).

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

Investments in emerging market bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging market bonds can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.

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