Through April, global equity markets continued their upward march. While the Federal Reserve emphasized “patience” and other major central banks maintained accommodative stances, investor expectations of policy became increasingly dovish. Global growth decelerated, but showed signs of stabilizing. Rates remained low, even as US equity markets hit new highs.
However, in May a re-escalation in US–China trade tensions compounded by new tariff threats on Mexico endangered this environment. Just as they had in the fourth quarter of 2018, markets fell on news that the United States was imposing new tariffs. Furthermore, hawkish rhetoric from both the United States and China raised significant doubts that a deal was imminent.
Looking ahead, we remain relatively optimistic about the economic outlook, but are concerned that protectionism could stall momentum. Against this backdrop of slower growth and heightened uncertainty, we believe some upside remains in equity markets, but that investors should upgrade the quality of their holdings in recognition of increasing economic risks. Likewise, in debt markets, we believe investors should take a more defensive approach until the risk/reward trade-off is more compelling.
United States: Decelerating as Expected
US real GDP grew 3.1% in the first quarter, well above expectations. However, headline growth was boosted by inventories, government spending, and trade. Real final sales to private domestic purchasers, a cleaner measure of underlying demand, rose just 1.3%. Robust jobs growth has resulted in the lowest unemployment rate in decades (see chart). Tighter labor markets have led to gradually improving wage growth, particularly at the bottom of the income spectrum, which should support consumer confidence and spending.
However, incremental uncertainty arising from the breakdown in US–China trade negotiations is challenging our previously optimistic outlook for growth. We worry that the implications for consumer and business confidence will be more consequential than the tariffs themselves and might be underappreciated by equity investors. If tensions continue to escalate, we expect the Fed to take an even more cautious approach to monetary policy.
The preceding is an excerpt from The Global Economic Backdrop. Read the full paper for a look at the base cases and key risks for the four major economies.
This document reflects the views of Lazard Asset Management as of 6 June 2019.
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