MARKET COMMENTARY

Economic Momentum Continues

03.22.2018 - Viraj B. Patel, CFA, FRM, CAIA

A Supportive Environment for Risk Assets

We remain positive about global economic growth and corporate fundamentals, but the easy financial conditions that dampened volatility in 2017 seem to be ebbing. In this environment, we believe risk assets will continue to offer the best total return opportunities, although investors should expect volatility to revert toward historical norms. 

Equities: Opportunities at Home and Abroad

We maintain our overweight exposure to equities despite the February spike in volatility. We still see the most promising opportunities in international developed markets such as Europe and Japan. 

In the United States, we have a neutral recommended weight to equities. Within US equities, we prefer small-caps over large-caps because they tend to be more sensitive to economic growth. The distinct shift from monetary policy to fiscal policy that was punctuated with the passage of tax reform last December bodes well for the US economy and should benefit smaller companies. Within US large-caps, sectors like financials should benefit from stronger economic growth, lower taxes, deregulation and higher rates as the Fed continues to normalize policy. 

In emerging markets, we continue to recommend a neutral weight. But after another year of improvement in the economic and corporate backdrop, we continue to look for opportunities to raise our outlook on the asset class.

Fixed Income: Headwinds Mount, Selectivity Is Key

As the Fed continues to gradually normalize monetary policy, bonds appear to offer limited total return opportunities, and we have therefore maintained an underweight position to the asset class. Expectations of a pickup in inflation have caused a further backup in interest rates to start the year. Moreover, the significant level of deficit spending expected in the US could boost the supply of Treasury bonds at a time when the Fed is taking its foot off the gas pedal as a buyer. 

Within fixed income, we still prefer US investment-grade credit to government bonds. And to guard against interest rate risk, we are maintaining our short duration bias relative to the benchmark. For investors in high tax brackets, the municipal bond market continues to offer tax-advantaged income, although selectivity remains key.

Alternatives : A Hedge aganist Volatility

Low market volatility and interest rates have weighed on hedge fund performance in recent years, but rising rates could present hedge funds with new opportunities. As we look for market volatility to pick up from the record low levels of 2017, alternatives could offer investors valuable downside protection and further diversification in multi-asset-class portfolios.

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This communication is intended solely to provide general information. The information and opinions stated are as of March 22, 2018 and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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