After a summer marked by geopolitical tensions, investors entered the fourth quarter of 2017 with renewed optimism in global growth. Notably, investor sentiment has become more upbeat relative to the summer, as signs of upbeat macro fundamentals and corporate strength have been the dominant theme driving markets. Higher oil prices, a firmer U.S. dollar, a less dovish tone to central banks, a steepening yield curve, improving leading indicators and a focus on U.S. tax cuts have all caused a rotation into year-long laggards adding a firmer foundation to the market.
As we move to close out the year, the global economy is enjoying a synchronized cyclical upswing. Improving global growth, better economic surprises in developed economies, largely accommodative central banks and improving earnings momentum are all driving global risk assets higher.
Here, we outline five economic observations, and the leading investment themes investors should be paying attention to as we approach 2018.
Economic Outlook: Five Observations
Nothing But Net: Global Growth Is Accelerating
In the last few months it has been clear that the global economy is enjoying a sustainable economic expansion with a long-awaited cyclical recovery in investment, manufacturing, domestic demand and trade. For the first time in a decade, major developed and emerging economies are in sync, enjoying cyclical growth upswings, an occurrence which has been rare over the last 50 years. Expectations are for growth to accelerate in many economies over the next 12-18 months, with economic growth supporting risk assets and capital markets.
Just Right: Central Banks Are Supporting Markets Despite A Tightening Cycle
Central banks have responded to quickening economic activity by signaling the coming of policy normalization. In the United States, the Federal Reserve’s FOMC announced the long-anticipated beginning of unwinding of the Fed’s $4.5 trillion balance sheet. The current program is to run off $10 billion in securities in the first three months, with the amount rising to $50 billion per month over several quarters.
A similar dynamic is occurring in Europe. European Central Bank President Mario Draghi jolted the market in the summer when he noted that the strength of the European economy warranted a consideration of policy response and a further tapering of central bank asset purchases. While all indications are that policy normalization is at least three years behind that in the United States, it is a signal to the market that the long-awaited recovery from the double dip recession in Europe is finally at hand.