The Rides Not Over But We’re Getting Closer

By Krishani Memani

Are we there yet?

It’s the question many parents hear from their children on long family road trips.

Inevitably the answer is “no.” The children typically follow up with “Are we getting closer?” to which the reply is invariably, “yes.” Investors are asking very similar questions about the business cycle. Are we there yet? We believe the current macro regime, like all others, will end.

Valuations are at preposterous levels.The Federal Reserve is aggressively tightening policy.

The U.S. economy is rolling over. We are not there yet. Are we getting closer? Yes. The unemployment rate is low, wages have trended higher, credit spreads are historically tight, and policy rates in 2018 are poised to move higher. Still, 2018 is poised to be a good year for risk assets, in our view.
The major economies of the world are expanding in unison. Policymakers can still truncate this cycle with further monetary policy tightening, but modest inflation globally remains the saving grace. Emerging market growth in 2018 is likely to be stronger and more widespread than in the developed world.

China could be a phenomenal long-term story as the country transitions from “growth at any cost” to higher-quality growth. Importantly, growth in the emerging markets is likely to be less dependent on China as current recoveries in regions such as Latin America gather momentum. In the U.S., growth will be modest as the Fed continues to tighten policy.