Highlights
• The sharp selloff in the Turkish lira should remain relatively contained, meaning we do not expect contagion to spill over into the rest of the world.
• Trade issues remain the most critical risk to the global economy, but we do not see this issue causing a recession.
• We expect both stock prices and bond yields to rise over the coming year.
The sharp selloff in the Turkish lira dominated global financial markets last week, while investors also paid attention to signs of economic weakness from China. This created a generally risk-off move in markets. U.S. equities bucked the trend by climbing, thanks in part to hopes of improvement on the trade front. The S&P 500 Index climbed 0.7 percent for the week, with defensive areas and the industrials and financial sectors leading the way.1 In contrast, commodity-oriented companies, consumer discretionary and technology lagged.1
Weekly Top Themes
1. Trade issues appear to be improving on the margin, but we expect this issue to linger. President Trump decided last month to seal agreements on NAFTA and with the European Union, likely to gain traction on a harder line with China. Chinese officials are due to travel to the United States for another round of negotiations later this month, but we caution investors not to read this as an overly optimistic sign. We still expect trade issues to surface and perhaps escalate, and see little hope of significantly easing tensions this year.
2. Inflation is likely to continue to slowly climb. As economic growth accelerates, inflation pressures are mounting. We believe prices and wages will continue rising marginally into 2019.
3. Corporate earnings growth is likely to decelerate in the second half of the year. Following an incredibly strong first and second quarter, corporate management teams are indicating the operating environment may grow more difficult. A combination of trade concerns, increased margin pressures, higher commodity prices and rising wages could put downward pressure on earnings.
4. Capital spending continues to strengthen. The second quarter saw another solid rise in spending. Capital expenditures rose 17 percent year-over-year, with the technology sector leading the way.2 Although trade concerns have not yet weighed on capex levels, policy uncertainty could negatively affect future planning.