The Uncertain Road Ahead: What Should Investors
Are the U.S. and other global economies strong enough to stand on their own footing without so much monetary stimulus? That is the question we at Segal Marco Advisors have on our minds after the mid-year mark of 2017.
We’ve seen slow but steady growth in the U.S. economy, with unemployment marching lower (albeit with a virtually unchanged labor force participation rate), consumer confidence at a healthy level, and an increase in real GDP of 2.6% in Q2, more than double the gain from Q1.
These are all favorable conditions for the Federal Reserve sticking to its schedule for rate hikes and for beginning the unwinding of its balance sheet assets. But what happens when the Fed’s proverbial foot comes off the gas pedal?
There is similar optimism in the Eurozone. Growth is slow, as in the U.S., but unemployment is trending lower, along with other positive factors such as increased business and consumer confidence, manufacturing, and industrial production.
The European Central Bank has intimated a downshift in its monetary stimulus may be around the corner as well. Can these recent positive trends continue without assistance?
The answer to the question of how markets may respond to reduced monetary stimulus is unknown, and investors should be aware of that fact. And if there is anything recent history has taught us, it’s that global events, and the markets’ reaction to them, are unpredictable.
Emerging markets have experienced recent tailwinds that have powered their stock performance. The largest economies – Brazil, Russia, India and China (the “BRICs”) – are growing steadily, as are the emerging markets overall (with the evergreen reminder that these economies individually are at varying levels of stability). Earnings are up, currencies have stabilized and a weaker USD has helped recent returns.
Segal Marco Advisors’ 12 to 18 Month Investment Outlook
There is no question that the U.S. equity market has been on a tear for a while, and from our perspective in Q2, it seems to be in a good place. Fears have subsided about market reaction to rate hikes and uncertain elections, and other risks from around the globe. Some other key supports for equities are low unemployment, interest rates and inflation. Inflows into equities on a global scale have been solid and earnings growth surged in Q2.
But while the good times continue to roll in equities, valuations globally are mostly above median, which tempers our outlook on the asset class overall. We see more opportunity in developed and emerging markets than in the U.S., as those areas are seeing more reasonable stock prices combined with the aforementioned favorable direction they’re trending economically.
Prospects for fixed income are generally lackluster. Low and negative yields worldwide are challenges facing fixed income investors. This does not mean that fixed income has struggled in 2017 – in fact, in both the U.S. and globally, bonds have made gains. Continued demand has pushed up U.S. Treasury prices, even as the Federal Reserve continues to raise short-term interest rates.
Credit in the U.S. is still benefiting from a solid economic environment. Also, global bonds have performed well this year with greater economic and political stability in Europe. With all that said, we think a multi-sector, global approach to fixed income makes sense in the current environment.
Regarding illiquid/private investments, we aren’t optimistic about seeing outsize returns in any of the sub asset classes over the near term (of course the benefits of investing in many of these asset classes are dependent on long term performance).
Pricing and capital waiting to be put to work have been steadily increasing, and valuations are generally high. We expect the sub asset classes will perform in line with expectations over the long term, but our views are tempered on earning much more than that.
How Can Investors Position Their Portfolios For The Long Haul?
Segal Marco Advisors recommends investors consider taking the following actions to prepare themselves for the road ahead.
- Complement core allocations with more opportunistic or niche investment strategies that may have more favorable return expectations.
- Focus on manager selection. Best-in-class managers are vital to navigating unknowns and capitalizing on investment opportunities. We like tactical, multi-asset class managers for this purpose as well.
- Diversify. It goes without saying that you may want to pack some essentials in a separate suitcase in case one gets lost.
What American author E.L. Doctorow said about writing, we think holds true of investing in today’s environment – it’s “like driving a car at night. You can only see as far as your headlights, but you can make the whole trip that way.” We must use to our advantage what we know now to be prepared for the unknowns around the bend.