Perspective on Markets

Since we last distributed a special commentary on general market conditions (MARKET PERSPECTIVE, FEB 6, 2018), stocks have rebounded from lows established on February 8, recovering most of the 10% decline. Thankfully, what we experienced then was an overdue, “normal” market correction, not the beginning of a cyclical meltdown triggered by a credit crunch induced recession, as was the fear.

In our view the risk environment is different because:

  1. U.S. economy has continued to gather strength in the back of Tax Reform and financial deregulation, and the Fed has signaled further Fed Funds increases for the remainder of the year.
  2. The rest of the world (ROW) has decoupled from the U.S., and growth rates for both developed and emerging market countries are slowing down significantly. This is contrary to the prevailing view last February, when the Wall Street consensus was for continued synchronized world economic growth.
  3. Recent U.S. initiatives on trade policy, a major platform promise in the 2016 elections, is creating confusion and outcry from various trading partners.

Recession risk remains the biggest potential driver of a major pullback. In our prior note, that concern was linked more to rapidly rising interest rates resulting from strong global growth, fueled by years of excessive monetary accommodation. Now, this concern is more a function of slowing ROW growth, aided by trade policy uncertainty. This could result in increased pressure on foreign banks and global credit conditions, which has the potential to back up into the U.S. financial system.

For our part, we think these uncertainties could prompt another normal correction, but again, our Macro analysis does not indicate an increased risk of a recession-induced cyclical downturn in the U.S. any time soon. Still, we see a more limited upside in stock prices due to these recent issues, alongside historically high valuation and the extended business cycle.

Our Investment Strategy Teams have all made modest shifts in positioning to align with what we believe to be the changing market environment. Critical review of all client investment policies, to properly position for both near and longer term risk/return conditions, will continue to be stressed in upcoming meetings and discussions.