In the May issue of our monthly flagship publication, we feature:

  • On the Record by Chief Investment Officer Tony Roth, Mind the cracks.
  • In Focus provides a look at the projected evolution and investment potential of the technology sector.
  • Investment positioning and asset class positioning updates.

Economic stumbles have been in some of the highest-level macro data, and 1Q U.S. growth decelerated to 2.3% annualized, after three straight quarters of roughly 3% growth. Consumer spending slowed despite the new lower federal tax rates implemented mid-quarter that were designed to give sales a boost. The biggest letdown has been in the eurozone, where surveys showed a broad-based deceleration in business activity after peaking in January. The same surveys show decelerations in the U.K. (since October 2017), and Japan is also starting to slow. 

Markets have followed suit, with returns on the disappointing side in the midst of the well-documented volatility this year. Through April 30, the year-to-date total return was: a decline of 0.38% for U.S. large caps and 0.78% for mid caps; a return of 0.72% for the aggregate developed international market index; and a return of 0.97% for emerging markets, the bright spot in equities. Strength in overseas currencies helped support non-U.S. equity returns in dollar terms. In our view, equity investors were spooked by some weaker economic data, as well as the prospect of rapidly accelerating inflation and fears that the Fed would meaningfully step up its rate hike path. While it’s true that recent inflation reports have shown faster price gains, they were anticipated. We expect 2018 inflation to keep picking up, but there are structural forces that we discussed in our Capital Markets Forecast, especially the “Amazon effect” and disruption of supply chains, keeping inflation from running away. And we don’t think the Fed will react strongly unless long-term inflation expectations move significantly higher; they remain fairly low.

Please see important disclosures at the end of the article.

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