As we close out the first half of 2017, global equity markets are hovering around record highs, long-term bond yields have been stuck in a low range, the dollar is currently stable to slightly weaker than expected, inflation is now below the target rate, asset price volatility has been tame, geopolitical risk is still elevated at this time and economic growth is following a traditional late-cycle pattern by trending upward from its mid-cycle slowdown.

The initial move up in risk assets was dominated by a solid profits cycle powered by the resurgence of Emerging Markets growth and the end of their bear markets. The global profit cycle benefits from a stable if not slightly weaker dollar, benign financial conditions and strong business and consumer confidence (a goldilocks environment that is not too hot and not too cold). We don't see this dynamic changing in the second half of the year. We expect risk assets to maintain their uptrend in Q3 and Q4 as the global synchronized economic expansion could continue.

One of the first half-criticisms of the strong equity market performance around the world and the record highs in the U.S. was that the "soft data," or sentiment indicators, were getting ahead of the "hard data," or core economic numbers. Isn't this typically the case when you are coming out of a mid-cycle slowdown and heading toward the late-cycle? Aren't equities usually a discounting asset class? Rising confidence in the growth outlook for both the world economy and the profits cycle lends itself to an equity environment that anticipates higher cash flows, increased capital investment, continued job growth and even a higher level of consumer spending. Confidence begets confidence! This is what was generally missing in 2015 and most of 2016 when secular stagnation dominated global economies. What changed? The dollar turned from a very strong bias to a weaker trend, which supported most global commodities and stabilized the Emerging Markets. In addition, China's fiscal stimulus package supported the emerging economies and Europe and Japan's monetary easing kicked in and economic activity surprised to the upside. Moreover, the U.S. continued to grow jobs but now enjoyed a tailwind in capital expenditures that was missing during the mid-cycle slowdown. Some of this increased investment reflected a relaxation of regulatory hurdles in the developed world but also, most importantly, rising business confidence thanks to the higher growth in the world's emerging economies we've seen for the first time in five-plus years!

This move from stagnation and the mid-cycle slowdown to the beginning of the late-cycle is occurring despite the fragile geopolitical environment and questions surrounding fiscal reform in the U.S. Economic growth is only moderate, which is one of the reasons why this latest equity market movement to record highs has been viewed with skepticism, but it is certainly coming off a very anemic trend. We like to attribute trends to the most dominant factor. In this case, easy financial conditions with rising profits are currently the "improvement factor" taking over and equity multiples are rising as a result. Because we are almost nine years into the recovery and growing below previous cycle trends, the latest advance is being viewed as unsustainable. In our view, this is an entirely new kind of cycle. A cycle that has some core elements of previous cycles (the expansion of the 1990s, for example) but one that does not have a "name." Perhaps this "no name" full cycle should be tagged: The Tortoise and the Hare Cycle. The tortoise is the global economy (and lagging regulatory framework) and the hare is the pace of innovation! This symbiotic relationship is leading to conflicting signals, concerns, disruption and displacement in some areas, but new markets and consumers, more efficient production and a low cost of capital may be powering the global profits cycle to new heights, in our view. This, in turn, continues to attract investment flows from the sidelines. Although we do expect a pause or small consolidation in the uptrend and continue to believe that the S&P 500, in particular, has a target level of 2,450 to 2,500, we also believe the risk is to the upside toward 2,600 for the second half of the year given our view that "this new cycle" continues well into 2018.

In the second half of the year, we expect investors to continue to focus on specific event risk surrounding potential central bank policy changes, geopolitical instability with respect to North Korea, the direction of oil prices, inflation and the U.S. dollar, and the next phase of China's growth. As the cycle advances we still believe a "grind it out" atmosphere prevails with both longer-dated yields and equity prices grinding higher. In our view, there are core short-term questions that are likely to dominate market action heading into 2018. These core themes/questions include: Are bond market yields telling us something the equity market doesn't know? Are equity valuations too high? Is the technology sell-off in its early stages or overdone? Is volatility gone for good? Is Inflation dead? Will taut labor markets in the U.S. and Europe trigger wage inflation? Can central bankers begin to normalize their grand monetary experiment sooner rather later? What is the "real" timing for U.S. fiscal reform?

The cycle should power on in a "grind it out" fashion as many of the answers to the above-mentioned questions materialize. In the end, we expect this late-cycle stage to approach the decade-long expansion of the 1990s in terms of years, which would take it to the mid-point of 2019 – albeit not without some small pull-back phases. Cycles do not die of old age, rather there is usually a policy error made mixed with excessive leverage that sparks the downturn in growth and asset prices. With the massive amount of liquidity (money) in the world still earning record-low yields (in some cases zero or negative yields), we expect the search for yield to continue and equity market weakness to be bought by cash-heavy investors in the months ahead. Although some de-risking of global portfolios may occur as we approach the Autumn months, we are more focused on the strength of the profit cycle, which we believe is still maintaining its positive momentum.


  • Given our thoughts on financial conditions, the U.S. dollar, inflation and profits, and still excessive liquidity without excessive leverage, we remain overweight equities versus fixed income.
  • We have a preference for non-U.S. equities across the board (namely Emerging Markets, Europe and Japan) and large-cap U.S. multinationals.
  • For sector and style-based investors we prefer most cyclicals (particularly Financials) to defensive sectors (such as Utilities) and have a slight preference for value versus growth. We still emphasize the attractive value and growth in Health Care and Information Technology longer-term.
  • Within fixed income, we prefer investment grade versus high yield given narrow spreads and lack of expected return for the level of risk.
  • From a portfolio construction perspective, as we move further into a late-cycle environment dominated by central bank balance sheet normalization, and with volatility expected to rise from record low levels, we emphasize a high level of asset class diversification, an increase in exposure to less-correlated investments where appropriate, a mixture of passive and active management across equity sub-asset classes and more frequent re-balancing between asset classes.


We believe the powerful combination of two large consumer spending pools—the growing emerging market middle class and the eventual movement of the millennials in the U.S. into their peak income-producing years—should be the engines of growth over the next decade. These demographics could likely sustain another housing cycle and benefit consumer services such as travel, leisure and entertainment. Technological progress should increase even faster as the demand for "real-time" analytics, experiences, automation and cybersecurity grows in importance around the world, in our view. In addition, rapid personalization in drug/biotechnology innovation, digitalization in finance and healthcare services, and energy/grid infrastructure re-development could be major components of the next growth cycle.


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Other important information

Past performance is no guarantee of future results.

All sector and asset allocation recommendations must be considered in the context of an individual investor's goals, time horizon and risk tolerance. Not all recommendations will be suitable for all investors.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Investing in fixed income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.

Tax-exempt investing offers current tax-exempt income, but it also involves special risks. Single-state municipal bonds pose additional risks due to limited geographical diversification. Interest income from certain tax-exempt bonds may be subject to certain state and local taxes and, if applicable, the alternative minimum tax. Any capital gains distributed are taxable to the investor.

Investments in high-yield bonds (sometimes referred to as "junk bonds") offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a junk bond issuer's ability to make principal and interest payments.

International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments.

Global investing poses special risks, including foreign taxation, currency fluctuation, risk associated with possible differences in financial standards and other monetary and political risks.

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Stocks of small and mid cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.

For investments in ABS, MBS, and CMOs generally, when interest rates decline, prepayments accelerate beyond the initial pricing assumptions, which could cause the average life and expected maturity of the securities to shorten. Conversely, when interest rates rise, prepayments slow down beyond the initial pricing assumptions, and could cause the average life and expected maturity of the securities to extend, and the market value to decline.

There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes, and the impact of adverse political or financial factors.

Nonfinancial assets, such as closely held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations, and lack of liquidity. Nonfinancial assets are not suitable for all investors.

Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties, such as rental defaults.

Alternative investments are intended for qualified and suitable investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity, and your tolerance for risk. Alternative investments are speculative and involve a high degree of risk.

An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage, and short sales, which can magnify potential losses or gains. Restrictions exist on the ability to redeem units in a hedge fund. Hedge funds are speculative and involve a high degree of risk.

Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time.

Diversification does not ensure a profit or protect against loss in declining markets.


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