Monetary policy is providing support, too: even though the Fed is starting to shrink the size of its balance sheet, monetary policy is still accommodative globally. And yields are low, but so is inflation.
Some investors worry that the flatter shape of the US yield curve today may point to slower growth, but in our view, the shape is more likely a result of quantitative-easing dynamics than a signal of recession. The economic cycle may be maturing, but it isn’t coming to an end.
As for US tax reform, we don’t have grand visions of what the new rules will do. But they should be incrementally positive, given the sound macro backdrop. Our bigger concern? A possible pickup in inflation, with tax reform likely to add to the pressure. If policymakers are forced to tighten financial conditions faster than markets expect, we could see a technically driven market sell-off.
The Portfolio Perspective: Equity Risk Is Attractive
Multi-asset strategies integrate a broad, diverse tool kit, including stocks and bonds, diversifying exposures such as real estate and global credit, and factor exposures—investments that thrive in different environments. Those allocations also have to be adjusted as market conditions evolve.
Today, the environment for taking equity risk remains attractive. In addition to the improved economic landscape, earnings growth is robust and labor costs are contained, which support corporate margins. Earnings growth will likely decelerate in 2018, but we still think mid- to high-single-digit percentages are likely.
The positive growth/policy combination should keep volatility low in the near term—a factor that should also help stocks. Extended periods of low volatility may seem uncommon, but history shows that they’re not (Display). And at the moment, we don’t see catalysts that could alter that picture.