Investors have been digesting a number of important global developments this year: fiscal stimulus, trade tensions, divergence in global policy and currencies, and political developments. As 2018 heads into the fourth quarter, we’ve put together what we believe these developments mean looking forward to 2019. Overall, we expect global growth to slow in 2019 but remain strong enough to continue to support the broad global economy and markets.
We continue to favor the United States and emerging markets (EM) over developed foreign markets for global equity allocations. We see the U.S. economy as the primary driver of our forecast for 3.8% global gross domestic product (GDP) growth in 2018, supported by new fiscal policies, while Europe and Japan may lag.* The United States remains a global earnings standout as well.
Turkey is facing a serious financing problem, and investors in emerging market debt (EMD) have clearly taken note. Turkey has borrowed heavily in foreign currency markets, much of it in U.S. dollars. That, by itself, is not an issue; borrowing in foreign currencies can attract new investor sets and help emerging market (EM) countries raise capital they otherwise could not in their own currencies. The problem for Turkey, however, is that the value of its currency, the Turkish lira, has fallen steeply relative to other currencies, including the dollar.
Overall, economic reports released in August—mostly reflecting economic activity in July—indicated solid U.S. economic growth without significant inflationary pressures, even though evidence grew of some cooling from trade concerns. The Conference Board’s Leading Economic Index (LEI), an aggregate of 10 leading indicators, increased 0.6% in July and 6.3% year over year, signaling low odds of recession in the coming year.
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...
For the second half of 2018, continued economic growth and market gains may bring the heightened drama of increased volatility. So while there may be some twists and turns ahead at LPL Research we expect the positive fundamentals may prevail.
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.
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.
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.