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

• Classic rock fans will know what I mean when I say that global economies and financial markets “got the Led out” in 2017. For those of you less familiar with the music of Led Zeppelin, we can sum up the year gone by with the exclamation that, at long last, the global financial crisis finally appears to be in the rear-view mirror.
• We figured the Fed was much further along the path of interest-rate normalization than other central banks, and that the large interest-rate differential in favour of US fixed-income securities would continue to bolster the greenback. However, the widening rate spread no longer seems to be a driver of the currency’s value. One outcome of the dollar’s drop has been a sharp improvement in profits for US exporters.
•  Although earnings estimates tend to fade through the year as estimates adjust to reality, this time may be an exception, because tax cuts have not yet been taken fully into account. The tax-reform package will also give companies the opportunity to repatriate funds abroad at an advantageous tax rate.
• Stock prices are rising because earnings are advancing smartly AND the earnings multiple is expanding. There’s no denying that valuations are elevated, especially when compared to five years ago. Still, we would argue that even this lofty valuation should not be considered a bubble, since it can be justified by the low level of bond yields and the strong trend in profits growth.
• We certainly would not rule out a garden-variety correction in stock prices of 5% to 10% somewhere along the line. The market is overdue for one—in 2017, the S&P 500 Index didn’t even register a price correction of at least 3%.
• We’re also sympathetic to the view that prices now discount much of the good economic news out there. We won’t be concerned, though, unless we see a more aggressive swing in Fed policy toward monetary tightness. If the interest-rate normalization process continues, the Fed’s policy stance would still be moderately expansive at the end of 2018.
• It’s possible that the US will see inflationary pressures finally begin to build in the New Year. Most labour-related statistics strongly suggest that the US economy is approaching full employment.
• We are looking for low, but positive, returns from US equities in 2018. The US large-cap market appears expensive, but there is the expectation that prices will be supported by the fact that earnings yields remain above bond yields.
• In all, we’re more optimistic on the eurozone’s economic prospects than we have been at any time since the start of the Greek debt crisis in 2010. Given our view that the region is a long way from employment levels that will stir inflation pressures, we expect monetary policy to be supportive of growth throughout the coming year.
• While time will tell whether the BOE’s economic projections and its view regarding future policy moves are any more accurate than those of the Fed, policymakers in the UK face tremendous economic challenges and uncertainties over the next few years. We think investors should tread lightly until there are clearer signs that inflation pressures have peaked and Brexit negotiations actually yield a favourable economic outcome for the country.
• Timing the market in anticipation of a short-term correction should be discouraged. Until we see a more significant deterioration in the economic and financial fundamentals that have underpinned the global bull market in risk assets over the past two years, we think it is best just to keep calm and ramble on.

Important Information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its affiliates assumes any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI.

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