SEI recently released its second-quarter Economic Outlook. A summary of the conclusions is provided below:

• In the US, stock-market sectors that did well immediately following the election of Donald Trump as President have corrected sharply and are now well below their pre-election levels, or have lagged the overall market meaningfully in the year-to-date. By contrast, post-election laggards have bounced back sharply.
• One can certainly make the argument that this market is overdue for some sort of pullback. It’s not a question of whether a correction will take place; it’s simply a matter of timing and magnitude.
• We are sticking to our expectation that a major tax bill will be pushed through Congress. This should boost the prospects for economic growth, but could eventually add to inflationary pressures.
• If fiscal stimulus adds to the budget deficit and investors suddenly become more concerned about the inflation outlook, the Federal Reserve’s (Fed) reduction in securities holdings could aggravate the upward pressure on bond yields.
• It appears that the central bank will begin the process of quantitative tightening by September. In our view, the policymakers at the Fed are looking past the current weaker-than-expected economic numbers to a time when tight labour markets could start to exert an upward impact on wages and inflation.
• US equities, as measured by the MSCI US Total Return Index, have lagged both developed- and emerging-market-equity benchmarks in the year-to-date. Perhaps the current bout of underperformance against the rest of the world will prove transitory. But we no longer view US equities as the best game in town.
• Improving economic fundamentals provide a good foundation for the rally in European equities. Most countries have experienced improvement in their business-sentiment indicators, even Greece.
• Loan growth in European businesses and households has accelerated to its best pace in six years. This encouraging (yet slow) expansion in credit argues strongly in favor of Mario Draghi’s long-standing preference to maintain the current pace of quantitative easing at least through the end of the year.
• The recent surprise UK election result will probably change the broad outlines of the final Brexit agreement. We see this as a better outcome for UK service industries than a complete sundering of the relationship.
• If a trophy were given out for the most under-rated stock market, we would give our vote to Japan. Japan’s surprisingly good stock-market performance reflects investor optimism over Prime Minister Abe’s reform efforts.
• Developing-market equities have been on a tear this year, building upon a credible performance in 2016. Despite the gains, emerging stock markets still look attractive on a valuation basis relative to developed markets.
• We still have concerns about the sharp increase in debt across developing economies. Much of that debt increase has been borne by the corporate sector, especially in China.
• At this point, we look for current trends to hold—moderate global economic growth, some pick-up in inflation that leads to further commodity-price gains, a stable or slightly weaker dollar—all of which provide a positive macroeconomic backdrop for emerging-market economies and financial markets.

A full-length paper is available if you wish to learn more about this timely topic.

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