MARK LUSCHINI, CHIEF INVESTMENT STRATEGIST. SPRING 2018. GLOBAL GROWTH HAS PEAKED. Global economic growth may have passe
GLOBAL ASSET ALLOCATION Pick up the Pieces
MARK LUSCHINI, CHIEF INVESTMENT STRATEGIST SPRING 2018
GLOBAL GROWTH HAS PEAKED Global economic growth may have passed its zenith but it is still operating at an elevated pace. Consumer and business confidence readings point in a positive fashion and enormous profit gains are translating into a capital spending cycle that is poised to accelerate. Low unemployment, rising wages and non-threating levels of interest rates and inflation offer strong tailwinds to buffer occasional bouts of geopolitically-induced turbulence. We expect the strong fundamental underpinnings of this late-cycle expansion to remain intact. That, in turn, should foster a hospitable environment in which risk assets continue to flatter portfolio returns. Gradually increasing inflation and the prospects that interest rates rise, at least on the short end of the curve, demands that investors brace for increased volatility as the paradigm shifts to account for a different monetary policy regime. Tactical Weighting - excluding Alternative Investments. 100% Stocks*
80% Stocks 20% Bonds
60% Stocks 40% Bonds
40% Stocks 60% Bonds
20% Stocks 80% Bonds
100% Bonds*
U.S. Stocks
50
40
30
20
10
0
International Stocks
37
30
23
15
7
0
Emerging Market Stocks
7
6
4
3
1
0
Fixed Income
0
20
40
60
80
100
Other/Alternatives
4
3
2
1
1
0
Cash
2
1
1
1
0
Category
1
*The benchmark weightings for Stocks is the MSCI ACWI index. Fixed income recommendations will generally be based off the Bloomberg Barclays Aggregate Bond Index.
Overall Strategy: Investors should overweight equities while underweighting safe-haven bonds and cash. While stocks have yet to fully recover from the recent pullback, our outlook for risk assets is still constructive. A more cautious stance will be warranted when the odds of an oncoming recession increase significantly from here. Equities: Global earnings per share are expanding at a rapid pace and forward estimates project further, healthy gains ahead. We strongly advocate globally diversifying portfolios by adding European and Japanese equities. Emerging markets, however, may be buffeted by the strengthening U.S. Dollar and warrant an underweight. Fixed Income: Central banks around the world are gradually moving toward less accommodative monetary policies and both short and longer-term yields have moved higher. The flattening yield curve is a symptom of the market’s interpretation that inflation is unlikely to erupt anytime soon. Other/Alternatives: The U.S. Dollar has rebounded fittingly as it is a countercyclical currency. While the rally may only arrest its secular decline temporarily, additional gains could develop should the Federal Reserve’s policy settings continue to tighten more vigorously versus those of major foreign central banks. SEE PAGE 3 FOR IMPORTANT INFORMATION REGARDING CERTIFICATIONS AS WELL AS OTHER DISCLAIMERS WWW.JANNEY.COM © JANNEY MONTGOMERY SCOTT LLC MEMBER: NYSE, FINRA, SIPC
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Global Equities Domestic The picture for corporate profit growth is bright and valuations are undemanding. Good, and perhaps even accelerating, economic growth should benefit industries within the technology, energy, industrial and financial sectors. Also, housing and e-retailers should prosper given the ongoing strength in consumer spending. International We continue to find European and Japanese stocks appealing. Both markets host companies with sub-U.S. valuations and appealing prospects for growth. Emerging market equities are far more nuanced. The recent rally in the Dollar is a counterweight to their progress and many face the unwelcome prospect of higher interest rates. Fixed Income Domestic With the uncertainty in the rates market, we see value in TIPS and floating-rate notes. We caution against high yield corporate bonds, non-rated preferred, and lower-rated securities. Acknowledging extension risk, mortgage securities also present a compelling alternative. Yields offered by municipal bonds are relatively attractive. International The European Central Bank is near the end of quantitative easing and will eventually raise rates. Given yields are so low, even a small increase could generate sizable losses. Therefore, we advocate underweighting European bonds. We would also underweight emerging market debt for similar risks their equity bourses face. Other/Alternatives Commodities The Commodity Research Bureau index has performed well. The complex is heavily influenced by the rise in the price of oil, which is up over 15% this year. We expect further gains as oil prices remain high, global activity stays above trend and supports the industrial metals, and the Dollar to eventually renew its decline. Currencies Central banks are slowly transitioning toward normalizing monetary policies. The U.S. is ahead of the curve, which has helped to put a bid back into the Dollar for now. However, the twin deficits and the moves by other central banks toward tighter policy settings will likely undermine a sustained rally in the greenback. Risks to Our Outlook Economic destabilization caused by rising geopolitical tensions Trade negotiations that metastasizes into a material provocation Shifting monetary policy settings that jar investor behavior This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such as securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. There are no guarantees that any investment or investment strategy will meet its objectives or that an investment can avoid losses. Investment products offered are not insured by the FDIC or any other government agency. They are not deposits or obligations of, or guaranteed by the financial institutions where offered. They also involve investment risk and past performance is not an indication of future results.
SEE PAGE 3 FOR IMPORTANT INFORMATION REGARDING CERTIFICATIONS AS WELL AS OTHER DISCLAIMERS WWW.JANNEY.COM © JANNEY MONTGOMERY SCOTT LLC MEMBER: NYSE, FINRA, SIPC
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