Calamos Investments: Economic Outlook

The third quarter proved difficult for investors as apprehension about slowing global growth and monetary and fiscal policies converged. As Figure 1 shows, volatility soared while equities declined sharply and commodities plummeted. Heading into the final months of the year, our positioning is cautious but reflects our view that the markets offer many opportunities, particularly among growth-oriented equities and convertibles, along with high yield.  

Although we remain positive, we expect elevated volatility to persist due to global growth concerns and central bank policies—including an uncertain Federal Reserve timeline and divergent courses among global central banks. Fiscal policy is likely to remain a focal point of market anxiety, with the U.S. election among the factors figuring prominently in this regard.
 
We believe the U.S. and global economies are likely to maintain a muted pace of expansion over the near term. The U.S. consumer remains strong, key data points in the euro zone have shown improvement and China has many tools to avoid a hard landing. In our view, fiscal policy remains a headwind to more robust expansion, with overregulation among the factors challenging entrepreneurship and business growth in a number of economies, including the U.S.  



Turning to the Fed, we believe that whenever a rate increase occurs, it should be viewed as a sign of the overall health of the U.S. economy, and also as an affirmation that the global economy is sufficiently stable. Additionally, our view remains that any interest rate increases are most likely to follow a slow and shallow path.

Moreover, a more normal interest rate environment will ultimately benefit the economy and equity markets. While larger corporations have been able to access capital to support their growth, the low interest rate environment has not been as kind to smaller businesses. Because interest rates are lower, the margins that banks make on their loans to small businesses have been lower too. This has contributed to banks’ reluctance to lend. If rates were higher, banks would be more likely to lend, provided that the economy was also growing. Small businesses are an important engine of job growth, so with more capital, they would be better able to hire more people, which would in turn support economic growth. Further, as illustrated in Figure 2, stocks have tended to perform well during the first year of an interest rate increase.



U.S. Equities
We continue to believe the U.S. stock market is in a reset period, as investors contemplate the prospect of slowing global economic growth, mixed messages from the Fed (potential tightening) and the continued easing from other central banks (Japan, China and the ECB). Market participants seem concerned about the central banks’ inability to manufacture inflation after several years of near-zero interest rates. These concerns have resulted in higher volatility, catching many investors off guard.

While recent job growth data has fallen short of expectations, our view is that the U.S. can still continue on its slow growth course through 2015. Although corporate earnings estimates have come down and commodity overcapacity will create pockets of weakness, other favorable factors should result in moderate growth. Most notably, positive job growth over the longer term (Figure 3), low interest rates and low energy prices are contributing to strong U.S. consumer activity (Figure 4). Also, a slowly expanding global economy can further support the U.S.