Low interest rates, decent global growth, stable monetary policy from Europe and America and expansionary policy from Japan and China are all good for equities. Yet there might be overcorrection. The USA economy has slowed, so has the world’s, and the threat of recession has risen. The pace for annualized gain on the S&P 500 is a whopping 65%. Yet volatility is very low level, suggesting complacency. Perhaps it is the sweet lull of expansionary monetary policy that we have witnessed over the last ten years.
Corporate earnings have eroded leaving current valuations high unless there is a stream of good news (US-China deal, No Brexit, Dovish Fed, recovery in China growth). While the US Federal Reserve will accept inflation above 2% (which factors in wage growth), this will directly affect earnings. A strong global labour market pushes up prices even as growth decelerates. Labour costs are a lagging indicator: wages top after recession is well underway. For investors, a mildly defensive position with thematic trades plus diversification and rebalancing will smooth out coming volatility.
Corporate earnings have eroded leaving current valuations high unless there is a stream of good news (US-China deal, No Brexit, Dovish Fed, recovery in China growth). While the US Federal Reserve will accept inflation above 2% (which factors in wage growth), this will directly affect earnings. A strong global labour market pushes up prices even as growth decelerates. Labour costs are a lagging indicator: wages top after recession is well underway. For investors, a mildly defensive position with thematic trades plus diversification and rebalancing will smooth out coming volatility.
By Peter Rosenstreich
