We made no changes to our tactical asset allocation recommendations this month, after a relatively active first seven months of the year. We’re frequently asked what would cause us to step back from our moderate overweight to risk assets — a policy that’s been fruitful despite the uptick in market volatility. The most likely catalyst would be a downgrade in our economic growth outlook. We need earnings growth to underpin and grow stock prices, as the support from monetary policy increasingly fades. While we have had increasing debate about the sustainability of the U.S. expansion, including recognition of the recent weakening of the PMI data, we still believe a slow expansion is the most likely outcome. Our risk cases continue to focus on populist political risk in the United States and Europe, while we also consider some upset to the Fed’s complacent stance as a potential risk during the next year. With investor sentiment still muted, we expect moderate growth along with stable inflation to continue to support risk taking during the next year.
Jim McDonald is an executive vice president and the chief investment strategist for Northern Trust.