Market Commentary Q1: A New Phase for Equities
SEI has issued its First Quarter Economic Outlook for 2018. The outlook contains information about:
- It is suspected that the bull market in U.S. equities is somewhere around the beginning of the end, while it may be closer to the end of the beginning in other countries. To be clear, we are not saying that the bull market in any part of the world is ending, any time soon. Instead, we are noting that the fundamental, technical and psychological factors driving equity market performance appear consistent with the latter stages of an up cycle.
- The Treasury yield curve remains upward sloping and, in our opinion, can narrow further without causing too many problems. Interest-rate spreads for investment-grade, high-yield and emerging-market debt also remain near cycle lows. High-yield bonds, in particular, should be considered the canary in the coal mine.
- As we have pointed out on several occasions in the past, the U.S. equity market historically has withstood the depressive impact of rising interest rates until the 10-year bond reaches a level of 4%-to-5%. Owing to the structural decline in bond yields and the elevated equity valuations that have resulted, we now think it prudent to assume that the stock market will begin to struggle if the 10-year Treasury bond rate were to approach 4%.
- Although the ride has turned bumpier, SEI believes that economic fundamentals justify further gains in U.S. and global equity prices. The synchronized global expansion is still alive and well. Earnings continue to climb briskly around the world. U.S. companies’ cash flows and earnings, meanwhile, are benefiting mightily from tax reform. There are few signs that a recession will rear its ugly head anytime in the next 12-to-18 months.