We are now entering a new phase of the business cycle, one that may bring more modest returns and greater volatility. We see none of the signs that indicate we’re at the end of a cycle, namely robust credit growth, mounting global inflation, and excessive equity valuations. Nevertheless, the end to the extraordinary central bank stimulus efforts marks an important turning point.
The U.S. economy begins 2016 growing below trend, as a result of the stronger U.S. dollar and an overall tightening of credit conditions. In this environment, no single country can decouple from the world economy because currency has become the great equalizer. Any country that grows faster than the rest of the world will see its currency strengthen and its economy slow as a result.
Recent action by the Fed and any further tightening policy during a period of weak global growth is likely to have consequences. If that occurs, we expect market volatility to emerge and intensify over shorter time frames.
Options for the short term:
- We remain cautious in the short term, as the U.S. market seems to expect further weakness.
- We believe in holding some cash to take advantages of opportunities that may emerge.
- Equity valuations in Europe appear more attractive than those in the United States
- Emerging market stock valuations are also attractive, but many EM equities may be impacted by tighter U.S. policy conditions
Options for the long term:
- Long-term, we expect modest growth, accommodative central bank policies and low interest rates—all of which favor equities over bonds and credit over Treasuries.
- The long-term bull markets in equities and credit are unlikely to end soon.
- When growth and income are scarce, investors are likely to pay up for it.
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