The Global Economic Backdrop

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

Base Case

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.

Certain information included herein is derived by Lazard in part from an MSCI index or indices (the “Index Data”). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. Neither MSCI nor any third party involved in or related to the computing or compiling of the Index Data makes any express or implied warranties, representations, or guarantees concerning the Index Data or any information or data derived therefrom, and in no event will MSCI or any third party have any liability for any direct, indirect, special, punitive, consequential, or any other damages (including lost profits) relating to any use of this information. Any use of MSCI data requires a license from MSCI. None of the Index Data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

This document reflects the views of Lazard Asset Management LLC or its affiliates (“Lazard”) based upon information believed to be reliable as of 6 June 2019. There is no guarantee that any forecast or opinion will be realized. This document is provided by Lazard for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service, or investment product. Investments in securities, derivatives, and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard’s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard’s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. Past performance does not guarantee future results. The views expressed herein are subject to change, and may differ from the views of other Lazard investment professionals.

This document is intended only for persons residing in jurisdictions where its distribution or availability is consistent with local laws and Lazard’s local regulatory authorizations. Please visit for the specific Lazard entities that have issued this document and the scope of their authorized activities.

Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries. Small- and mid-capitalization stocks may be subject to higher degrees of risk, their earnings may be less predictable, their prices more volatile, and their liquidity less than that of large-capitalization or more established companies’ securities.

An investment in bonds carries risk. If interest rates rise, bond prices usually decline. The longer a bond’s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Other risks, including inflation risk, call risk, and pre-payment risk, also apply. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Derivatives transactions, including those entered into for hedging purposes, may reduce returns or increase volatility, perhaps substantially. Forward currency contracts, and other derivatives investments are subject to the risk of default by the counterparty, can be illiquid and are subject to many of the risks of, and can be highly sensitive to changes in the value of, the related currency or other reference asset. As such, a small investment could have a potentially large impact on performance. Use of derivatives transactions, even if entered into for hedging purposes, may cause losses greater than if an account had not engaged in such transactions.

© Lazard Asset Management

More Fixed Income Topics >