Just back from a conference in Palm Springs and bringing you news hot-off-the-press. Good News! After a decade marked by false starts, a synchronized global upturn is under way. The bell-weathers of global activity are all pointing to higher economic growth, evidenced by South Korea -a proxy for world trade- notching up export growth above 20%*. US interest rates are on their way up, with 3 additional rate hikes expected between June and year-end. This speaks to the strength of the US economy and its ability to sustain higher costs of capital. Even places mired in recession have improving outlooks, with Brazil and Russia expected to add to global GDP, not subtract from it.
Risks remain of course, including geo-political uncertainty (Syria, North Korea, Terrorism) weakness in oil prices and a debt overhang in China. Overall however, we are of the view that fundamentals will trump each of these. Earnings/profits are up and Q2 numbers are expected to top Q1, pointing to global economic expansion.
The one fly in the ointment are valuations. Stocks are expensive and much of the above good news may already be priced in. But if economic conditions continue to improve, stocks may yet reward investors with additional gains. Should anything other than that materialize, the government and corporate bond allocations in our portfolios will mitigate market downside. We like our clients current portfolio model holdings and do not anticipate any significant changes to these allocations for Q2 and Q3.
So a more positive outlook, but as always, we like to hedge our bets and make sure that we protect you at every stage in the economic and market cycle.
Talk to you next week!