Things are going well – in the United States at least. Since the end of August, the S&P 500 has enjoyed the longest bull run in its history, posting new highs ever since. If we experience the typical year-end rally, the 3,000 mark could soon fall. The other indices simply cannot keep up. TheMSCI AC World Index did venture into positive territory in the course of the year but only because of its U.S. components. The U.S. economy could soon emulate the equity market and post a new record of its own. It is already in the second-longest economic upswing of the post-WWII era. In July 2019, it would become the longest. At the risk of sounding pro-cyclical, this is also our current expectation. The pace of gross-domestic-product (GDP) growth has taken us by surprise, so we have raised our U.S. GDP forecast for 2018 from 2.7% to 2.9%. Appropriately, the U.S. Federal Reserve (the Fed) sticks to its tightening strategy, and we expect neither interest rates nor inflation to overshoot. Meanwhile, the corporate sector is enjoying its new regulatory and financial freedom, rewarding first and foremost shareholders: profits are distributed rather than invested in wages or capital spending. This development, however, is unlikely to be sustained – just like Trump’s fiscal impulse will expire in 2019.
That begs the question: in which stage of the cycle are we now? The answer depends on the country in question. Unemployment and interest rates in the U.S. are, for example, on a completely different level than those in Europe. And in China, so far Beijing pretty much seemed to dictate the cycle by decree. But what scope will be left for China if the conflict with the U.S. escalates? This is just one of an array of looming political risks: trade war, Brexit, Italy's budget and the U.S. mid-term elections. Important decisions are pending in the coming months. That is one reason why our positioning is relatively neutral for fixed income, equities and currencies as we head into the fall. We do, however, see one glimmer of hope despite the risk of fall storms: our indicators suggest the cycle will not end any time soon. But markets appear to be pricing that in anyway. A fresh impulse could come from an extension of the cycle, for example via productivity gains.
Stefan Kreuzkamp, Chief Investment Officer