The fear triggers of just a few short months ago seem all but forgotten. Oil prices have risen, China’s currency has stabilized amidst some government stimulus, and the Federal Reserve seems firmly in control of interest rate policy, with even strong hints of increases ahead finding few naysayers. As a result, markets, too, are better behaved since the dark days of January/February.

As others are exhaling, though, we’re lifting our antennae a bit higher. We’re picking up hints of some moderation in U.S. housing and even U.S. labor markets. While they’re very faint, and not suggesting an imminent recession, they’re key to our efforts to look ahead. Further, we believe the falling earnings we’ve seen since late 2014 need to see a reversal, perhaps fueled by falling commodity prices. Otherwise the increases in stock prices that drove small caps and mid caps, in particular, to very dear levels, in our judgment, will be hard to stomach.

Tony Caxide

North America

Tony M. Caxide, CFA®

Chairman - Senior Investment Council

Yet again we’ve seen a rather weak first quarter (in terms of economic growth) with an apparent rebound in the second quarter, though it’s early days still. Whether it’s a statistical issue (because of lessthan-perfect seasonal adjustment factors in the winter months) or happenstance, the economy continues to bounce near 2% and a recession does not appear imminent to us. However, we do expect that, come middle 2017, the risks will rise meaningfully as we anticipate that interest rates (the usual driver of expansions and contractions) will have risen by then in a setting of tighter labor markets and faster wage growth, which nearly always accelerates when unemployment drops to current levels.

We’ve argued for some time that “moderate could mean sustainable,” and continue to believe it as we’re experiencing one of the longest post-world-war recoveries on record and phenomenal stock market performance to boot. If only anybody could have enjoyed it.

Jeffrey G, Wilkins


Jeffrey G. Wilkins,

Deputy Chief Investment Officer

Prime Minister Abe and his Central Bank Governor may face a difficult and conflicting set of economic data and global pressures as they determine if Japan’s economy requires further stimulus, either fiscal or monetary. Preliminary real GDP for the recent quarter, which is notably subject to revision, suggests that Japan may have avoided a technical recession due in part to stronger-than-expected household spending. On the other hand, Japan’s leading indicators have been suggesting lower growth and earnings since last summer. That measure has historically been highly correlated with later changes in fortune. Should further stimulus be decided upon, Japan’s leadership will likely take into account a growing chorus of concern over any policy that may weaken the yen relative to its trading partners, as those partners are struggling with weak growth of their own.


Srinath Sampath, CFA®, PhD

Managing Director, Portfolio Management

The expanded European Quantitative Easing program will take full effect in June, with lowered bank lending rates already in force and a wider variety of assets becoming eligible for European Central Bank (ECB) purchase next month. A preliminary first-quarter GDP of 1.6% year-on-year, strong retail and auto sales, and a gradually declining unemployment rate suggest that the measured approach taken by the ECB to infuse liquidity into the markets has been the correct one. However, core inflation still runs below one percent, and the desired weakening of the euro has not yet materialized. Prodigal child Greece continues to pose a challenge to the EU recovery, with its austerity measures deemed inadequate by Germany and the International Monetary Fund. Furthermore, the “Brexit” referendum is set for late June, when the United Kingdom contemplates withdrawing from the European Union.


Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

The first official estimate of UK GDP growth showed the economy lost momentum in the first quarter, with a growth rate of 2.1% on a year-over-year basis. The manufacturing PMI for April suggests the sector got off to a poor start in the second quarter. The UK’s service sector is still expanding, but it’s at the lowest level since 2013. Corporate earnings continue to slump. The murky growth and profit outlook, plus the headline risk around the “Brexit” referendum in June should more than convince the BOE that a higher rate in 2016 may not be warranted.

Emerging Markets

Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

Emerging markets stabilized early in the second quarter as the U.S. Federal Reserve hinted that there will only be two rate hikes instead of four this year. As a result, the dollar weakened and oil prices recovered. India GDP is expected to grow above 7% this year, although its industrial sector is still relatively weak. The Mexican economy is growing steadily (about 3%) with mild inflation (2.5%). In China, due to the unrelenting stimulus measures and other interventions since last fall, both the stock market and its currency are holding up. Of course, the debt-driven stabilization/recovery brought questions of sustainability. Brazil is still in the recession swamp, and the impeachment of President Rousseff may ultimately lead her out of office. Whether a new administration can lead the nation out of the woods gives investors both hope and anxiety.