Climbing the Wall of Worry Among Mid-Year Optimism

By Jae Yoon via Iris.xyz

Summer has been heating up the news cycle. Trade headlines dominate; midterm elections are impending; interest rates are on the rise; a strong second quarter stokes conversations about peak growth.

The takeaway is clear: there are a lot of disconcerting issues for investors.

There is something to this conversation. A late-cycle economic environment is one in which investors should gradually prepare for managing risk. The low-hanging fruits of growth have been picked; the supply of available labor gradually becomes scarcer; wages rise at an increasing rate; debt financing becomes more costly; and corporate profits face downward pressure.

Economic downturns cannot be avoided, and timing the markets is very difficult. That said, we remain constructive in 2018 and into 2019, and believe that the balance of positives outweighs the negatives for portfolio positioning. Within this context, we have identified seven key risks to the U.S. macroeconomic environment that contribute to investor hesitance heading into the end of the year – seven bricks in a wall of worry. Our macroeconomic view debunks each of these concerns. This turns market participant hesitation into a positive opportunity, as markets historically climb the wall of worry.

Seven bricks in a wall of worry:

  1. An inverted yield curve is historically known to predict recessions. However, we do not yet have an inverted yield curve – only a flattening one – and even an inverted curve can be a long-dated predictor.
  2. Rising interest rates impact fixed-income markets and could slow consumer and business gains. For now, the Fed’s normalization policies are healthy.

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