Global economic growth exceeded expectations in 2017, and we expect another strong year in 2018. The Citi Global Economic Surprise Index, which was well above zero for most of the second half of 2017, signaled that global economic data was exceeding expectations [Figure 1]. Drivers of strong global performance in 2017 included steady growth in the United States, better-thanexpected economic data in Europe, continued positive performance from Japan, and stabilization in China following several years of deceleration.
We favor U.S. and emerging market (EM) equities for tactical global allocations. After reviewing our thoughts on the U.S. equity markets in last week’s Weekly Market Commentary, we thought we’d expand our 2018 equity outlook with a focus on global markets. As discussed in our Outlook 2018: Return of the Business Cycle publication, from a regional perspective, we favor the U.S. and EM over developed foreign markets broadly, although the improving outlook in Japan is noteworthy.
We look back at U.S. fixed income performance in 2017, while exploring what themes may persist in 2018. Today’s Bond Market Perspectives will provide a high-level performance recap for 2017 that we hope will be helpful for year-end client conversations, in addition to a summary of our fixed income market views for 2018 following passage of the new tax law.
Economic reports released in December 2017, which mostly reflect economic activity in November, largely exceeded economists’ consensus expectations and suggested continued steady growth in the U.S. economy. Data pointed to an economy that picked up some speed from the 2.2% average pace of growth during the current economic expansion. The Bloomberg-surveyed consensus estimate for fourth quarter gross domestic product (GDP) growth stood at 2.7% as of year-end, following the revised 3.2% GDP growth rate reported for the third quarter.
The Portfolio Compass provides a snapshot of LPL Financial Research’s views on equity, equity sectors, fixed income, and alternative asset classes. This monthly publication illustrates our current views and will change as needed over a 3- to 12-month time horizon. Read recent issue...
Stock markets, bond markets, the economy, policy — some years they push and pull on each other lightly as markets follow their own path; in others, one influence, such as monetary policy, dominates. But sometimes, often following a period of change, understanding the pushes and pulls and how they interact becomes a key to reassessing market dynamics for the next year and beyond.
An important shift has taken place in this economic cycle. The Federal Reserve (Fed) was finally able to start following through on its projected rate hike path, raising rates twice in just over a three-month period. By doing so, the Fed showed increasing trust that the economy has largely met its dual mandate of 2% inflation and full employment, that the economy is progressively able to stand on its own two feet, and that fiscal policy may now provide the backstop to the economy that monetary policy has provided throughout the expansion.
During any presidential election, you can expect a barrage of promises from the yard sign endorsements, bumper stickers, stump speeches, and media headlines. All pledge to improve the economy, provide better education for all, and preserve the environment.
The Economic Cycle - We believe we are in the mid-to-late stage of the current expansion, but we are still seeing some early cycle and late cycle behavior. Extended loose monetary policy, inflation, and employment growth are still exhibiting early cycle behavior, while some items relating to corporate profits are showing late cycle behavior, although they may be reset if profits improve.