The markets have been noticeably more volatile in recent months as the economic recovery approaches its limits. Between trade wars with China, continued uncertainty on the Korean Peninsula and with Russia, and a tightened monetary policy by the United States Federal Reserve—recently joined by the European Central Bank—we are seeing the beginning of a slowdown to one of the longest economic recoveries in history.
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There are three main themes of 2018 thus far that we would like to highlight:
1) Inflation is rising as we experience the lowest levels of unemployment since 2000. This is beginning to contribute to upward price pressure, originally prompted from rising wage levels.
2) At current market price levels, there is inherently less economic reward available to investors to compensate for taking on stock market risk.
3) There is still room for the global economy to rise regardless of increasing volatility and gathering geopolitical tensions.
Though inflation, volatility, and geopolitical tensions seem to be ever present in the market (and the news, for that matter), the underlying economic fundamentals remain strong and attractive, particularly in the US.
While it is easy to get bogged down by headlines and uncertainty, it is important to maintain a prudent approach to asset allocation decisions and exposure to the expanding market.
Looking forward for the second half of 2018, we believe that inflation will continue to increase, propped up by low unemployment numbers and pressure from the Federal Reserve.
The global economy still has room to run, though the risk-reward trade-offs continue to tighten for investors across the board.
Related: What level of investment risk are you most comfortable with?