Our view of the markets has not changed significantly since the end of the 2nd quarter. However, risks have been rising along with market returns throughout the year.
Overall, the key supports to the economy and markets remain in place. However, costs pressures, monetary policy uncertainty, and fiscal policy politics represent new, and potentially negative dynamics, for investors to consider.
With interest rates remaining stubbornly at levels that are well below reported or expected inflation, fixed-income returns will continue to be lackluster at best. But rapidly rising interest rates and bond yields do not seem imminent.
We remain moderately overweight in equities. But in such a high valuation market – with inflation signals flashing warning signs, Fed policy potentially in transition, and growth likely peaking – we continue to believe this is not a time for aggressive positioning.
Security selection, focusing on quality, durability, and solid fundamentals regardless of sector is important, particularly in a choppy, somewhat leaderless market environment.
Outside the U.S. equity market, the developed markets, particularly Asia (outside of China) and Europe, appear to be in a better position than the emerging markets. Emerging markets will remain challenged by the surprising insinuation of the Chinese government in their economies, rising interest rates, a stronger dollar, and geo-political tensions.