- In the US, odds of recession are low, and profit growth and credit trends have yet to show signs of deterioration.
- The global expansion is on firm ground, though inflationary pressures are accelerating.
- Stay diversified including international stocks and inflation-resistant assets.
- 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 economic expansion.
- Profit growth and credit trends have yet to show the signs of significant deterioration that typically occur during the late stage of the business cycle.
- However, US labor market tightness is supporting wage pressures, which act as a restraint on profit margins and should give the Federal Reserve (Fed) further confidence to continue to tighten monetary policy.
- The global expansion remains steady and relatively synchronized across major economies.
- Broadly speaking, most developed economies have low recession risk and are in more mature (mid-to-late) stages of the business cycle, with the eurozone enjoying above-trend growth in both core and periphery countries.
- China's economy remains in an expansionary phase, but policy-makers’ continued tightening stance has begun to affect growth. Activity in the property and industrial sectors has softened over the last several months, and we believe China is poised to decelerate.
- Overall, the global expansion is on firm ground, but maturing cycles imply that inflationary pressures are building and peak activity levels have probably already been reached.
Asset allocation outlook
- We continue to favor global equities in an environment of steady growth, low inflation, and significant monetary accommodation.
- However, we believe the world is in the midst of a slow transition toward a less accommodative monetary policy stance, global activity is likely peaking, the US business cycle continues to mature, asset valuations are generally elevated, and geopolitical risks are rising.
- We anticipate that firming global inflation will foster the shift toward monetary policy tightening, leading to slower liquidity growth and higher volatility in the financial markets. Therefore, smaller cyclical tilts are warranted, in addition to thorough portfolio diversification that includes international equities and 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.
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