Among the advantages of being an independent wealth management firm is the freedom to draw from a variety of sources as we craft our own investment views and analysis.  Those sources include institutional asset manager, Wellington Management, a firm that traces its roots back to 1928 when it established the first balanced mutual fund in the United States.  At our annual client earlier this year, we invited Tom Spicer of Wellington, to share with us the firm’s thoughts on the coming year (many of which line-up with our own opinions).  Highlights of our opinions, Tom’s comments and the lively Q&A follow.

 

While the overall economic environment is favorable, many investors remain concerned about valuations and complacency. Central banks around the world are beginning the process of raising interest rates and tightening an atmosphere of “easy money” after years of  monetary accommodation. While this may sound like the ‘end of the party,’ the general take is that central banks will be careful and gradual in their withdrawal of support, thanks to an economy strong enough to withstand a bit less ‘punch in the bowl.’ An expectation of moderately higher interest rates, means an environment that supports “balanced boldness.” 

 

Despite record-setting equity markets in the US, international and emerging markets edged higher in 2017. This equity market leadership transition is expected to continue into 2018. Within the equity allocation of diversified portfolios, the change in leadership in 2017 from US-based to international markets, including emerging markets, is expected to continue.  Solid global demand and a stable China should continue as tailwinds for continued global economic growth. The strength of emerging markets signals a continuing favorable market for both equity and bond investments. Growth is expanding and inflation is falling.  Europe is the fastest-growing economy among major developed markets, both consumer and business confidence stand at multi-year highs.

 

After nearly a decade of Wall Street prognostications, higher interest rates finally seem to be on the horizon (that common Wall Street phrase, “never wrong, just early” comes to mind).  The global economy is signaling it can handle higher interest rates because it is robust…enough.  Inflationary pressures should remain modest due to a positive combination of improving productivity and the combined forces of technology, globalization and demographic trends.

 

The US economy continues to expand at a steady clip. Thanks to a strong job market, reasonable wage gains and rising homes prices consumer confidence is high. Business investment is also starting to rebound and capital expenditure forecasts are increasing. Against this backdrop, some combination of deregulation, tax relief and infrastructure spending should likely add to growth in 2018.  These positives may be slightly offset by higher than average valuations.

 

Overall, the wild card is inflation. An unexpected rise in inflation could force central banks’ hands toward more aggressive tightening and that raises the risk of recession. Global trade is another risk.  Severe trade restrictions enacted by the US, coupled with a rise in inflation could cause a ‘stagflationary dynamic,’ which is a fancy word meaning a combination of rising inflation, slowing economic growth and increasing unemployment.  Lastly, geopolitics remain a concern.  However, any market disruptions associated with geopolitical events are likely to be temporary (think back to the markets’ negative reaction to Brexit followed by a relatively quick recovery).  The risk of a recession appears low while the risk of a market correction seems higher…and normal.

 

So, what does all this mean for you?  As always, the beginning of a New Year is a good time to revisit portfolios to ensure they include broadly diversified pools of assets from both the equity and fixed income buckets.  After years of US market leadership, making sure there is adequate portfolio exposure outside of US borders seems prudent as non-US market leadership that began in 2017 may continue.  Of course, any investment strategy should be constructed with the unique goals and circumstances of the individual investors for whom the strategy is designed.