March market outlook: growth continues

Positive momentum and solid economic backdrops in the U.S. and abroad are constructive for stocks.

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Three key takeaways

✔  U.S. and global growth are solid.

✔  Growth-oriented policies are expected.

✔  Consumer confidence and business sentiment is rising.

Positive momentum continues in the U.S and abroad. Dirk Hofschire, senior vice president of asset allocation research, offers insight on what this may mean for investors in his monthly market catch-up with Lars Schuster, institutional portfolio manager for Strategic Advisers, Inc., a Fidelity Investments company.

Schuster: Can you provide a brief review of what's been going on in the markets recently?

Hofschire: Stock markets both in the U.S. and around the world have been buoyant over the last several weeks. Overall, we seem to be in a Goldilocks type of environment, where U.S. and global growth is solid, but not running too hot for the Federal Reserve or other monetary policymakers to raise rates significantly.

Interest rates are staying very low, and while we haven't had much additional detail on some of the new economic policies that are being proposed in Washington D.C., there is still a lot of optimism for growth-oriented policies to come. These are some of the factors contributing to the positive momentum in the markets recently.

Schuster: Could some of these pro-growth policies actually spur higher economic growth in the U.S.?

Hofschire: We've heard President Trump, before he even took office, say that getting U.S. real growth up to 4% might be a goal. That’s much higher than we've had recently and I think that will be hard to achieve over the long term. We have an aging demographic profile in the U.S., which means fewer new workers coming into the labor force. We don't have as many young workers, so sometimes it's challenging for productivity rates to move much higher.

So, over the long term, I think that U.S. growth is likely to be slower than it’s been historically, but an acceleration in the short term is possible. Deregulatory actions from the federal government have been proposed, and in some cases, have already begun, which could lead to faster growth. There are tax cuts and reform potentially on the docket for Congress this year, and we’re already seeing a pickup in small business confidence and other forms of business sentiment. So if all this translates into rising business investment, we could see an increase in the growth rate.

As a cautionary note, however, I think it’s worth noting that we are in a more mature phase of the business cycle at this point. That means that labor markets are tighter now, wages are going up, and inflation has been picking up. Monetary policymakers in the U.S. have started to raise interest rates in response. So if we do see a move to much higher growth, it could also be accompanied by higher inflation in this environment. That might lead to more monetary tightening and some other offsetting effects that might cap the sustainable upside.

Schuster: So given this more mature market environment, what are some of the investment implications?

Hofschire: When you take into account that there is a very solid U.S. and global economic backdrop, in fact probably the most synchronized global expansion we've seen in the past several years, that’s still a pretty constructive environment for many riskier asset classes, like stocks. But from a valuation standpoint, stocks are now starting to price in more and more of this good news and maybe even some expectations of some policy moves that haven't even happened yet.

I think it's still a favorable climate for global equities generally, but it's also not really the time in the business cycle to take big outsized risks above and beyond what you would normally hold on a long-term basis. We are at a more mature phase of the cycle and, at some point, we're going to see a turn where things will not be continuing to get progressively better. So, as always, it’s important to stay diversified in this type of environment.

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