Our Investment Strategy & Research Group provides insights on the markets once a month (Economic Flash), each quarter (Economic Outlook), and whenever the markets or investments warrant special attention.
Back to What We Think.
A tight labor market makes it more likely that inflation will begin to rise faster than 2% annually, providing cause for the Federal Reserve to continue raising interest rates. We expect a rate increase mid-June and at least one more by year-end.
US equities could continue to rise in 2018 on big earnings gains vs. 2017, plus a near-term rebound in economic growth. A major concern: the potential for rising interest rates as the Federal Reserve tries to fend off the inflationary effects of a tight labor market amid an expanding economy.
The near-term outlook for markets and the economy is good, boosted by the 2017 tax cuts. Longer term, however, we think markets are particularly vulnerable to a dramatic increase in interest rates. We discuss the factors driving interest rates higher, and how we have positioned LNWM portfolios as a result.
There are valid reasons for the drop in US equities so far in 2018 — profit taking, concern about trade wars and potentially stricter regulation of US tech giants. Underlying these headlines we see a stable US economy in the late stages of expansion that should continue to provide near-term opportunities for return, albeit with higher volatility.
Higher stock market volatility is likely to become the norm as uncertainty about the pace of interest rate increases around the globe remains at the forefront of investors’ minds. Additionally, a risk we identified earlier this year — the potential for protectionist US trade policies, such as high tariffs that disrupt markets — has increased.
As goes January, so goes the year? Current market and economic fundamentals support a positive finish for 2018. However, we think inflation is a rising risk for both stock and bond valuations. In fixed income, our focus on strategies less vulnerable to rising interest rates is proving to be beneficial. In equities, we are adding positions likely to benefit from inflation, such as infrastructure and commodities.
Tax cuts are likely to boost the US economy even more, resulting in rising stock prices (at least in the near term), higher inflation and interest rates. Find out about the adjustments we are making to LNWM portfolios to prepare for the shifts in US monetary and fiscal policy as we head into 2018.
Heading into 2018, we are not reducing our overall allocation to global equities. We do expect to shift our equity mix to incorporate sectors that offer value and are likely to benefit from a pickup in inflation.
We expect strong Q4 economic growth and corporate earnings to support equity markets through 2017. However, given higher valuations and more difficult earnings comparisons in 2018, we continue to evaluate more defensive positioning.
It’s too early to call an end to this bull market, but we are looking for ways to reduce risk. The prospect of higher interest rates, political gridlock and geopolitical tensions, are major concerns that require more vigilance.
We expect Federal Reserve actions in Q4 2017 to negatively impact pricing for most bonds. However, we think the Fed will continue to clearly communicate its action plan, which should help keep market volatility subdued.
Within equities, we have grown more cautious due to rising valuations and the recent uptick in volatility, driven by geopolitical concerns. We are evaluating whether our portfolios may benefit from more defensive positioning as we head into Q4.
The recent rebound in US economic growth indicates stable outlook. To bump the growth rate up (closer to 3% or more) changes to fiscal policy are needed, such as tax reform and/or infrastructure spending.
After a very good 2nd quarter for equities, we are far from complacent. Monetary policy is shifting, US tax reform and infrastructure spending are uncertain, and there are ongoing geopolitical tensions. All this will weigh on the bond and stock markets.
High demand for fixed income, due to demographic and economic forces, is likely to prevent a dramatic shift upward in interest rates. With this in mind, we are evaluating higher-yielding areas, such as emerging markets debt, for the portion of our fixed-income portfolios seeking excess return.
The European Central Bank’s stimulus program is starting to pay off, as European stocks led global equities in May. Europe (minus the UK) was up nearly 5% for the month, on improving earnings and stronger economic data.
We continue to find many foreign markets more attractive than the US, due to stronger underlying fundamentals. The election of centrist Emmanuel Macron as France’s President has removed a major threat to Eurozone stability and bolsters our positive outlook on the region.
We think the market rally so far in 2017 has been driven mostly by fundamentals, not the new administration’s proposed fiscal policy. As the markets continue to climb a “wall of worry,” we expect the recent pickup in volatility to continue, making global diversification more important than ever.
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This will be a year of transition, with major implications for investors. In our Q1 2017 Economic Outlook, we outline the factors we think will be driving the markets, including the interaction of Trumponomics and global monetary policy, as well as how we are preparing for the year ahead.
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