US Economic Dominance
Tax cuts in the US have led to an acceleration in US economic growth this year. In September, US unemployment reached its lowest level (3.7%) in almost 50 years.1 We expect this acceleration to be temporary as the fiscal stimulus begins to fade over the coming year.
With continued positive economic momentum, central banks have been moving towards normalizing monetary policy, with the US furthest along in the process. The Federal Reserve raised the Fed Funds rate for the third time in 2018 during their September meeting (2.00% to 2.25%). Investors are expecting roughly two more rate hikes based on current bond market pricing.2
We are Entering the Late Stage of the Economic Cycle
As central banks withdraw support, interest rates are rising, and market volatility is picking up. This is likely to produce falling asset prices and, ultimately, a slowdown in economic activity.
Traditional Assets are Facing Headwinds
Low yields and rising cash rates create an incentive for investors to move out of traditional assets and into cash. Below are year-to-date returns for major asset classes. All are down except for those assets (US equities and credit) that have directly benefitted from the US fiscal stimulus.2
Polls are suggesting that Democrats are likely to take the House, while the Republicans are likely to keep their Senate majority. Without a single party majority, additional fiscal stimulus (e.g., further tax cuts or infrastructure spending) is significantly less likely.