5 Key Economic Drivers for 2018

March 5th, 2018

The market's volatility has lately increased. Here are the five major issues we are keeping an eye on as long-term investors as we navigate greater turbulence:

  1. Inflation - Global economic growth rates have been stronger than projected at a period when central bank policy has remained accommodating. Furthermore, we now have additional fiscal stimulus in the United States as a result of tax reform. All of this has resulted in thriving markets for hazardous assets. Inflationary pressures are rising, which might prompt central banks to tighten monetary policy more forcefully than currently anticipated.
  2. Geopolitical Disruption - We've enjoyed a reasonably calm geopolitical climate for the past decade. Leaders have done exactly that, propelled by an electorate that appears to prefer an internal emphasis. Some argue that this is justified, given the US's historical role in upholding global order. Regardless of one's opinion on the US's position, one must agree that the geopolitical situation feels less stable, raising the likelihood of some disruption (including trade wars) that would be devastating to the global economy and financial markets.
  3. Corporate Earnings — given the importance of values, earnings are always a focus. Companies' forward-looking profit expectations have already begun to rise as a result of the recent US tax cut. What remains to be seen is whether this will result in increased valuations and higher stock prices. Or will earnings finally catch up to stock prices, which have already completely reflected the increased estimates?
  4. Monetary Policy Shift — As economic data improves, there is a risk that central banks may become overly aggressive in their efforts to tighten monetary policy. We feel that markets have grown accustomed to free money and, as a result, are more sensitive to any adjustments. With that stated, we believe some monetary stimulus is required and anticipate three further interest rate rises in the United States in 2018, as well as the Federal Reserve continuing to sell (or not replace) fixed-income assets on its balance sheet.
  5. Long-Term Advantages and Disadvantages of Tax Policy Changes – One may argue that the US economy did not require an additional "boost" (lower taxes) because we are at or near full employment and GDP growth has improved. We support tax policies that boost US competitiveness and productivity, but we are hoping that this will not be a missed chance to lower the national debt.

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