- US economic growth remains healthy.
- Global expansion continues, but with growing evidence of slowing momentum in developed and emerging economies.
- China's economy remains in an expansionary phase, but risks of a growth recession continue.
- Broad-based US growth implies a low probability of recession, and the US remains in a prolonged shift between the mid- and late-cycle phases of expansion.
- Economic growth remains healthy, but late-cycle pressures have recently been on the rise, including tighter labor markets, continued Federal Reserve rate hikes, and a flattening yield curve.
- Corporate tax cuts have boosted US markets and partially offset these late-cycle pressures, but their effects are likely to fade as monetary policy grows tighter.
- Overall, the global expansion continues, but there’s growing evidence of slowing momentum in both developed and emerging economies.
- China's economy remains in an expansionary phase, but the risks of a growth recession continue to rise from trade war concerns and decelerating domestic activity.
- The cyclical trajectory of emerging-market countries remains at risk given decelerating global growth, looming trade uncertainties, global monetary tightening, and China's industrial slowdown.
- Within developed economies, Europe has experienced the most significant slowdown.
Asset allocation outlook
- We believe global activity has peaked, the US business cycle continues to mature, asset valuations are not generally attractive, and trade policy risks may be underappreciated.
- As the positive effects of corporate tax cuts fade, the shift toward global monetary policy tightening will likely result in higher volatility in the financial markets.
- Therefore, smaller cyclical tilts are warranted at this point in the cycle, in addition to thorough portfolio diversification that includes inflation-resistant assets.
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.