Investors are getting way ahead of themselves in the current “risk off” environment. The end of “goldilocks” theory, which is driving sell everything mentality, does not have a structural support we would need for the pullback to snowball into an extended correction. Markets are pricing in a USA growth slowdown while inflation should continue to rise. “Stagflation” environment generalize weighs on stock prices. However, the thinking that decelerating activity outlook in 2H would pressure elevated EPS, is only marginally accurate.
While the US might be in late stage business cycle, a majority of the worlds, Europe, japan and China are in an early to mid-stage cycle. Our view that weakness in the US will be supported by economic strength elsewhere. In regards to worries over central banks tighten we suspect that fears of the ECB , SNB and BoJ exiting policy earlier than expected is unfounded (option pricing in steep drop in USDCHF and USDJPY on the near term seem just reactionary) . The Fed took years to evolve tightening cycle likely other central banks will emulate this gradual approach. Global loose monetary policy will continue from a relative position in 2018. And this factor support further risk taking.
By Peter Rosenstreich
