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Markets: Global growth positive, but uneven

The US is firmly in the late-cycle phase but with low near-term risk of recession.

  • By Dirk Hofschire, CFA, SVP; Lisa Emsbo-Mattingly, Director; Jacob Weinstein, CFA, Research Analyst, Asset Allocation Research and Caitlin Dourney, Analyst,
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Key takeaways

  • Global growth remains positive but has become more uneven.
  • The US consumer backdrop remains strong amid low unemployment, but wage growth may have peaked.
  • Low US recession risk implies it’s too early to have high conviction in the likelihood of extremely bearish scenarios.
 

United States

The US is firmly in the late-cycle phase but with low near-term risk of recession.

  • Consistent with typical late-cycle trends, we are currently seeing tight labor markets, challenged corporate profit margins, rising inventories, less accommodative monetary policy, a flat/inverted yield curve, and tighter credit conditions.
  • The US consumer backdrop remains strong amid low unemployment, but wage growth may have peaked.
  • Corporate earnings growth has decelerated due largely to higher worker compensation, weak global growth, and a fading boost from the 2018 tax changes.
  • The Fed appears willing to ease policy if conditions deteriorate, although historically, rate cuts have been less effective late in the economic cycle.
 

Global

  • Global growth remains positive but has become more uneven, and many major economies have progressed toward more advanced stages of the business cycle.
  • Rising trade tensions and higher tariffs, particularly between the US and China, are a significant threat to global growth.
  • China’s fiscal and monetary stimulus measures have helped stabilize the country’s growth trajectory, though the magnitude of stimulus is less than during previous cycles.
  • Overall, global activity appears to have passed its peak, and it remains to be seen whether China’s stabilization will prove sufficient to incite a sustained domestic and global reacceleration.
 

Asset allocation outlook

  • Consistent with a maturing business cycle, asset-class patterns may become less reliable, warranting smaller cyclical tilts and prioritization of portfolio diversification.
  • Meanwhile, low US recession risk implies it’s too early to have high conviction in the likelihood of extremely bearish scenarios.
  • The less hawkish posture of the US Fed since the beginning of 2019 has provided some relief for financial conditions, but monetary policy and the global liquidity backdrop remain much tighter than they were 2 years ago.
  • Overall, we expect the late-cycle environment to provide more volatility and 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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