Although global growth is forecast to come in at 3.9% this year and next, according to the International Monetary Fund (IMF) some regions are losing momentum as noted in their July 2018 World Economic Report.
Monetary policies have started to diverge. In the developed world, the Federal Reserve has taken the lead in its normalization process, while other central banks like the European Central Bank (ECB) and the Bank of Japan (BOJ) remain relatively accommodative.
Although we expect to see continued flattening throughout the second half of the year, we do not expect an inversion of the yield curve to take place any time soon. Even when the curve inverts, history suggests that it can be another 18 months before a recession arrives.
We continue to believe that earnings — rather than interest rates — will continue to support equity markets at this stage of the cycle, especially in light of mostly benign inflation. Investors should expect overall returns to be more modest than earlier in the cycle with security selection becoming increasingly important.
We continue to believe that the U.S., China and the EU will be able to resolve their differences and ultimately reach a mutually beneficial solution on trade. Additionally, while equity markets have historically traded down in the months before midterm elections, they typically rebound in the fourth quarter of the election year.
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