Editors' Note

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Market outlook: Increased uncertainty

Global growth remains positive but uneven, and the risk of US recession remains low.

  • By Dirk Hofschire, CFA, SVP; Lisa Emsbo-Mattingly, Director; Joshua Lund-Wilde, Research Analyst; and Jacob Weinstein, CFA, Senior Analyst, Asset Allocation Research,
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Key takeaways

  • Recession risk in the US remains low, and the US consumer backdrop is strong amid a low unemployment rate.
  • Global growth remains positive but has become more uneven.
  • We expect the late-cycle environment to provide a less favorable risk-return profile for asset markets than during recent years.
 

United States

  • The US is in the late-cycle phase, characterized by tight labor markets, less accommodative monetary policy, and a flattening yield curve.
  • Recession risk remains low, and the US consumer backdrop is strong amid a low unemployment rate, accelerating wage growth, and manageable financial obligations.
  • Corporate earnings growth in 2019 is expected to decelerate as businesses face margin pressures from higher wages, global demand remains tepid, and the boost from 2018 tax changes fades.
  • The policy backdrop is highly uncertain, with the direction of monetary and trade policies unclear.
 

Global

  • Global growth remains positive but has become more uneven, and many major economies have progressed toward more advanced stages of the business cycle.
  • Global manufacturing remains in expansion, but the outlook has deteriorated and activity levels have likely passed their peak.
  • China is in a growth recession, and policy easing measures so far appear insufficient to sustain a reacceleration.
  • China's slowdown, in addition to global monetary tightening and trade-policy uncertainty, has weighed on the industrial sectors in Europe and other export-oriented economies.
 

Asset allocation outlook

  • Consistent with a maturing business cycle, asset class patterns may become less reliable, warranting smaller cyclical tilts and a prioritization on portfolio diversification.
  • Meanwhile, low recession risk implies it's too early to have high conviction in extremely bearish scenarios.
  • After an unprecedented period of global monetary easing, the shift toward global monetary tightening has turned into a liquidity headwind that may cause asset-market volatility to remain elevated.
  • Overall, we expect the late-cycle environment to provide a less favorable risk-return profile for asset markets than during recent years.
 

Business cycle framework

The business cycle, which is the pattern of cyclical fluctuations in an economy over a few years, can influence asset returns over an intermediate-term horizon. Cyclical allocation tilts are only one investment tool, and any adjustments should be considered within the context of long-term portfolio construction principles and strategic asset allocation positioning.

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