We have observed for some time that monetary policy – simply put, the level of short-term interest rates – has been stimulative throughout much of the world. The key exception is the U.S., where the central bank has been gradually raising rates. This is an important exception, given our size and consumption patterns.

The economic behavior that’s resulted appears consistent with this supportive monetary environment. Europe, Japan and even emerging economies are showing flickers of improvement, whereas several U.S. indicators are hinting at a gradual easing in both economic and earnings growth. Though we’re not likely on the edge of a U.S. recession, we feel it’s worth noting as we assess it in the context of financial market valuations.

Tony Caxide

North America

Tony M. Caxide, CFA®

Chairman - Senior Investment Council

Some corners of the U.S. economy are showing hints of a gradual slowdown in growth. Further, the probability of immediate and sizable infrastructure spending and tax stimulus/reform has been reduced due to political hurdles and intra-GOP splits on policy. This does not mean recession is imminent. Rather, it suggests that growth could moderate, which may be acting as a headwind for earnings, which are growing at only low rates. That said, economic and jobs growth have remained strong enough to further tighten the labor market.

The latest official measure of unemployment says 4.3%, which is historically quite low. Even if we tweak it for certain discouraged and/or involuntary part-time workers, an adjusted rate might be near 5% – not far from the lows of recent economic cycles. Historically this has triggered rapid acceleration in wages, impacting inflation. In this cycle wages have increased, but not yet at the rapid rates of the past.

Jeffrey G, Wilkins


Jeffrey G. Wilkins,

Deputy Chief Investment Officer

Japan’s corporate profits posted further gains in the first quarter of 2017, with large manufacturers delivering exceptionally robust growth. While these companies are reaping the benefits of a somewhat weaker yen, they have yet to pass those benefits on to their workers, despite the tightest labor market in over 20 years. How wages in Japan have not accelerated is a bit of a conundrum, but can likely be explained in part by an entrenched deflationary mindset. The central bank and government leaders remain committed to reflation, and global growth is supporting their efforts.


Srinath Sampath, CFA®, PhD

Managing Director, Portfolio Management

The results of the recent French elections were ultimately pro-eurozone, with centrist Emmanuel Macron becoming president with a resounding majority. For the moment at least, the populist, anti-European Union sentiment has taken a back seat.

The central bank’s quantitative easing program, launched in early 2015, is slated to continue its current pace of bond purchases through year-end, and ECB President Mario Draghi hinted recently that more accommodation could be on the way. This extraordinary monetary stimulus would normally weaken the currency, but instead the euro has strengthened 7.1% versus the U.S. dollar this year. Several indicators are positive: the economy is growing at a steady 1.7%, interest rates continue to be low, core inflation is running at 1.2%, and industrial production is strong. However, early elections in Italy could rekindle euroskeptic sentiment, and Greece is still in the midst of debt repayment negotiations with its creditors. To paraphrase a wise denizen of ancient Greece, Heraclitus of Ephesus: in Europe, the only thing that’s constant is change.


Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

The UK’s Q1 GDP growth came in at 2%. Business investment may be improving, and recent manufacturing surveys suggest robust expansion. The mortgage market continues to be healthy even as housing prices cool from a high level. The retail sector is relatively slow due to higher prices and lower consumer confidence. The uncertainty of a hard Brexit and UK’s general election also played a role in consumer caution. Inflation has emerged as a new challenge. The UK’s CPI was 2.7% in April, which exceeded the BOE’s target rate of 2.5%. Real wage growth ground to a halt as inflation increased. In spite of some volatility in the currency market, UK equity investors so far have shrugged off uncertainty over the general election and Brexit. The FTSE 100 Index recently stood at its highest levels since the 2008 financial crisis.

Emerging Markets

Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

EM equities are some of the best performers so far this year. The improving prospects for growth and their resilience to U.S. President Donald Trump’s protectionist rhetoric and geopolitical risk bolstered investors’ optimism. Given unimpressive earnings growth and the possibility of additional Fed rate hikes, EM valuation is not as cheap as it was a year ago. Recent manufacturing surveys from China still suggest continuing expansion, but the momentum is less robust, especially in the small-business sector. China growth is expected to ease in the coming months amid the country’s regulatory crackdown. India’s economy registered 6.1% (YoY) Q1 GDP growth, the slowest pace in over two years, driven by some reform mishaps last year. Brazil’s economy is walking out of a long recession, but its renewed political turmoil could bring new uncertainty to the recovery.