Here’s a word that’s not very inspiring: Lackluster. But that’s what keeps coming up when we look at global markets and economies. There’s not much prospect for solid returns on bonds in the short term. And equities aren’t much better, as global economies remain in a plod-along state, with tailwinds that we saw in February now faded. Like I said, lackluster.
Still, as we note in our Global Market Outlook third quarter report, this “new mediocre” contains potential opportunities. For instance, we’re looking to sell market rallies and buy into dips. The caveat here is that we really want to see some conviction with either direction markets are heading. We saw a substantial dip in mid-February, when global equities had fallen nearly 20% from their 2015 peaks1. That led us to go contrarian and buy. We’ll be on the lookout for more opportunities like that going forward.
Global divergence continues to be a dominant theme. The European Central Bank (ECB) is purchasing corporate bonds, and there is speculation that the Bank of Japan (BoJ) is moving toward money-financed government spending. The U.S. Federal Reserve (the Fed) may be moving a bit more slowly than our team had anticipated at the beginning of 2016. However, in their view, the steady tightening of the labor market will put enough upward pressure on inflation to trigger at least one Fed rate hike in the second half of the year.
The third quarter report also discusses three key economic indicators that reinforce our view that growth will continue, but without much steam. These include U.S. non-farm payrolls, where we’re seeing a marked slowdown in jobs growth – but still enough growth (150,000 new jobs per month) to keep pressure on wages. We’re also watching S&P 500 earnings, where we’ve seen a profit slump but now think the worst is behind us. Still, think lackluster. We once believed we’d see 3%-5% earnings per share (EPS) growth this year, but now expect something closer to zero growth.
Our third key indicator is emerging markets exports. We’ve seen recovery from their lows here (except for Russia) but not much strength. Bellwether South Korea, for instance, saw exports in the three months ending in May that were 8.5% below last year2.
The report also discusses where we see the building blocks of value / cycle / sentiment playing out against global equities (hint: U.S. stocks are pricey). We take a look at what to expect from bonds in the months ahead (not much). Lastly, we discuss where we see the still-strong dollar moving (sideways!).
It’s a challenging investing environment, to be sure. We’ll be looking for subtle shifts and sifting through the economic noise to really figure out what is going on.
For more details, visit Global Market Outlook.
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