• Fueled by the consumer sector, the global economy has stabilized and the outlook appears brighter today than it did one year ago.

• Trade issues, however, represent a significant threat and could potentially derail equity markets.

• We remain constructive toward stocks heading into 2020, but are concerned that valuations already reflect high levels of optimism.

Since the summer, investors have grown significantly less pessimistic about the global economy and financial markets. Stock prices have been rising as investors have been moving money into equities. In contrast to conditions a few months ago, financial markets now appear priced for a much better economic environment, and investors are anticipating more progress on a U.S./China trade deal. We think the macro environment is solid enough to sustain the current risk-on trade, but we are increasingly concerned that stocks may have gotten ahead of themselves.

Economic Growth Has Been Stabilizing (For The Most Part)

The global economic environment seems to be healthier than it was a year ago. Notably, we see evidence of more solid growth around the world, and not just in the U.S. as was the case through much of 2018. The consumer sector in particular has been quite strong and has propelled the broader economy.

One year ago, investors were highly worried about a global recession, but those risks appear to have faded. In fact, if anything, we think investors may have grown too optimistic over prospects for stronger growth, as reflected by rising stock prices. We think risks remain, especially regarding the manufacturing sector and global trade levels. We don’t think it will happen, but weak manufacturing and trade could act as a drag and significantly slow down global economic momentum. We think it is more likely that the strong consumer and service sectors could help provide a lift to manufacturing data. But so far evidence of that scenario has been scant.

Trade Woes Represent A Significant Risk

The main culprit behind any economic weakness continues to be the rise in protectionism and broad trade policy uncertainty. Trade issues have clearly hurt global manufacturing levels, caused a downshift in business sentiment and depressed capital expenditure spending. If protectionism persists and new tariffs continue to be enacted, this damage could deepen.

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