This points to a bumpy road ahead for markets, especially when combined with elevated geopolitical risks and slowly rising inflation. Yet we do not believe lower returns and higher short-term volatility spell the end of the equity bull market, now in its ninth year. Nor do we see warning signs, such as a widespread buildup in leverage, that would signal the end of the expansionary cycle. We see synchronized global growth with room to run providing a solid foundation for equities. We see higher interest rates ahead, but plentiful global savings should keep yield rises moderate – even amid rising U.S. bond issuance. We prefer to take risk in equities over credit. We see market returns being driven by earnings growth, dividends and coupons, rather than rising valuations. This, too, is a return to normal. We prefer equity markets with higher earnings growth, such as the U.S. and emerging markets (EM). In fixed income, we prefer EM debt and short-duration U.S. bonds. The latter’s recent yield increases reflect anticipated Fed hikes and make for an attractive risk/reward tradeoff.

2. Week In Review

• Global equity markets rose, moving back into positive territory year-to-date in U.S. dollar terms. Materials and energy stocks led. Oil prices hovered at a 40-month high, supported by tighter U.S. inventories and the possibility of extended OPEC production cuts. The VIX declined. The two-year Treasury yield rose to its highest level since August 2008.

• First-quarter U.S. earnings came in solid. Roughly 80 percent of companies beat analysts’ expectations, and earnings are on track to grow at the highest rate in seven years. Reports from meetings of Germany’s and France’s leaders suggested eurozone reform momentum had stalled. UK inflation undershot expectations.

• China’s central bank cut its reserve requirement ratio for the first time in two years amid evidence deleveraging is causing a contraction in credit creation and hurting investment. China economic data marginally disappointed.

3. Week Ahead

April 23: Japan Nikkei Flash Manufacturing PMI; U.S., eurozone, Germany Markit Flash Manufacturing PMIs

April 24: U.S. consumer confidence

April 26: European Central Bank monetary policy meeting announcement

April 27: U.S. Q1 GDP, employment cost index; UK Q1 GDP; eurozone economic sentiment; Bank of Japan monetary policy meeting announcement