2018 Global Market Outlook

Opposing Market Forces Vie for Dominance in Early 2018

Fiscal stimulus adding to already strong global growth momentum

Central banks becoming more hawkish, with the U.S. Federal Reserve potentially hiking four times this year
Global equities could still push higher before facing headwinds later in the year

March 28, 2018 — SEATTLE–(BUSINESS WIRE)–Russell Investments released its 2018 Global Market Outlook – Q2 Update today, offering economic insights and market forecasts from its global team of multi-asset investment strategists.

After a volatile start to the year, investors face complicated market conditions. U.S. tax cuts, synchronized global growth and strong corporate profits are battling monetary tightening and inflation pressures for control of global economies. The tailwinds are prevailing for now, but the strategists believe headwinds could overcome markets later in the year as interest rates rise, inflation picks up and profit margins come under pressure from rising labor costs. Protectionist trade policy has also emerged as a risk, but the team views a full-blown trade war as unlikely.

“We continue to see Europe, Japan and emerging markets outperforming the U.S. in what could be a relatively flat year for global equities,” said Andrew Pease, global head of investment strategy at Russell Investments. “We are still looking to add risk into market pull-backs, but we recognize that ‘buying the dips’ may become more challenging as markets grow more sensitive to recession risks later in the year.”

A Fiscal / Monetary Tug Of War

The U.S. is experiencing a highly unusual tug of war between fiscal and monetary policy with Congress passing tax cuts and a large increase in discretionary government spending, while the Fed will have to limit this stimulus to prevent the economy from overheating. In anticipation of rising inflation and faster rate hikes, 10-year U.S. Treasury yields have risen and are now in-line with the strategists’ fair value estimate. However, U.S. equities, in the team’s view, remain very expensive.

“The outlook for the U.S. economy and corporate profits in 2018 is strong, but the challenge for markets is that this optimism is already priced in,” said Paul Eitelman, multi-asset investment strategist for North America at Russell Investments. “Given our underweight preference for U.S. equities in multi-asset portfolios, we see global diversification and active management as important tactics for investors seeking to capture returns while managing downside risk.”

The outlook for the U.S. economy and corporate profits in 2018 is strong, but the challenge for markets is that this optimism is already priced in

Outside the U.S., the eurozone continues its mid-cycle renaissance, according to the report, despite the strong euro. The team’s outlook for Asia-Pacific remains solid as global growth underpins demand and monetary policy remains relatively accommodative. The Japanese yen has overtaken the euro as the most attractive developed market currency, and the strategists see potential for its positive run to continue.

For more details on this report, please see the 2018 Global Market Outlook – Q2 Update.

 

 

 

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