A Global Macro And Market Update: Does The Rally Have Legs?

27 Feb 2019 By Caroline Miller

The investment world feels like a much calmer place today compared to the panic that sunk risk assets into year-end. The rally we’ve seen in all flavors of beta since the Dec 26 low in global equities begs two questions: How long will the good times roll? Has the recent roundtrip in volatility and risk asset valuation revealed some virtue about the resilience of the current business cycle, or only exposed how sensitive our highly levered global economy and financial system are to the palliative effects of low interest rates?

In my 27Feb19 webcast, I survey two key variables animating the tension between global growth, financial conditions, monetary policy, and risk assets: 1) the thrust and global growth multiplier of Chinese monetary and fiscal policy and 2) the outlook for US inflation. 2019 is likely to unfold as a year of two halves. In the first half, global equities will benefit from the non-inflationary growth dynamic that is sustaining earnings in developed markets without triggering a shift to restrictive monetary policy. In the second half of the year, core U.S. inflation should return to the Fed’s target via rising wage growth, a function of a very tight labor market, reviving justification for U.S. rate hikes. Concurrently, per the Fed’s revealed sensitivity to financial conditions and anxiety about the weak pulse of global growth, evidence that China’s growth slowdown is reversing, thereby lifting global growth by mid-year, will reduce concerns that a tightening bias in the US will provoke another global market riot.

BCA presciently sounded a cautious alarm about the global equity market late last June. We flipped that switch back to an overweight recommendation on December 20, judging that markets had discounted too bleak an outlook for global growth. Since then, the Fed-sponsored easing of financial conditions has underwritten a recovery in risk assets, but the macro fundamentals are also showing signs of light. A recession is not in the cards for 2019.

 

Listen to my 27Feb19 webcast here:  A Global Macro And Market Update: Does The Rally Have Legs?

conference 2020
bca webcast

Suggested Reading