In this issue, Research Affiliates discusses positioning for potentially volatile markets and the link between equity valuations and macroeconomic conditions.

No doubt you’ve heard before that bull markets don’t die of old age. I can’t say for sure what will end this particular business cycle—no one can—but we’re seeing huge shifts in monetary and fiscal policy right now that investors can’t afford to ignore. As I often say, government policy is a precursor to change.

Environmental, social and governance (ESG) factors are being recognized in fixed income investing as value-added indicators of potential economic performance. In the latest edition of “Global Macro Shifts,” the Templeton Global Macro team outlines how it integrates ESG factors into its research process.

The economic calendar is normal but featuring the monthly employment report. Usually that would be the focus, and it might become so by week’s end. Until the situation is clarified, the paramount question will be: Has the US ignited a trade war?

A recent paper from the World Economic Forum – the group that runs the Davos conference – stated that Americans pay more for healthcare than other countries but get inferior outcomes. That rhetoric was amplified by Warren Buffett, when he called health care costs a “hungry tapeworm” eating into the American economy. But, before you assume that Americans are not getting good value for their health care dollars, let’s look at the data.

In my view, the idea that higher risk means higher expected return is one of the most dangerous and misunderstood propositions in the financial markets. The reason it’s dangerous is that it ignores the central condition: “provided that one is choosing between portfolios that all maximize expected return per unit of risk.” Presently, the S&P 500 is both a high risk and a low expected return asset.

We are amused when commentators cite just one factor for a market movement because there's almost always a confluence of factors influencing the markets at any one time.

President Donald Trump’s proposed tariff on imported steel and aluminum, at 25 percent and 10 percent, is much more than a shot across the bow. Indeed, this could be the official kickoff of the trade war we all anticipated. The protectionist trade policy, announced this week as the president met with metals executives, raised fresh inflation worries and had an immediate impact on capital markets.

Blackstone is pleased to offer the following Market Commentary by Byron Wien which shares his thinking on global economic developments, market insights and other factors that may influence investment opportunities and strategies.

The House Financial Services Committee has shifted Fed Chair Powell’s monetary policy testimony to Tuesday, February 27.

The opening months of 2018 have seen volatility return to global financial markets, but we think it is important to stress US economic fundamentals have remained broadly the same. After an unusually long period of calm in many markets, the reappearance of volatility at some point seemed likely, even if the speed of market gyrations has been unsettling for investors.

The upcoming Italian election is not attracting the same sort of attention among investors as votes last year in France and Germany. For that very reason, David Zahn, Franklin Templeton’s head of European Fixed Income, believes an unexpected result might provoke an outsized market reaction.

U.S. fiscal policy has become unmoored, and it will be difficult to steer it safely back to shore.

In our view, the prospective low-return environment calls for a capital-efficient approach that pairs actively managed bonds with passive or enhanced equities in target-date, core and retirement-income allocations.

We respectfully disagree with BlackRock’s stance on U.S. and European equities. Here’s why.

Federal Reserve officials like to say their policy course is “data-dependent.” That sounds very cautious and intelligent, but what does it actually mean? Which data and who’s interpreting it? Let’s ask a few questions.

Market volatility has spiked recently, driven largely by growing concerns about rising inflation and interest rates. We think the volatility is exaggerated, but we’re not surprised inflation is rising—and rates along with it.

So most know we took one of our South Florida speaking tours last week. Such tours consist of meeting with portfolio managers, presentations to clients of Raymond James, branch visits with our financial advisors, doing the media thing, well you get the idea.

PIMCO takes a long-term view of markets and economies, one that anchors investment decisions during shorter-term periods of market volatility. Nonetheless, the dramatic return of market volatility has understandably unnerved many investors.

The economic calendar is heavy. In the battle of competing explanations for the market declines, the inflation story has taken center stage. With both PPI and CPI scheduled for release this week, I expect many to be asking: Will rising inflation spark another leg down for bonds and stocks?

Last week’s turbulence shined a harsh spotlight on the stock market. Appropriately so, if that’s where your investments are. But in the hubbub many investors are missing the deeper and far more urgent bond market issues.

It seems that after years of expecting inflation to rise to its 2.0% target the Federal Reserve and many
economists have concluded it’s just not possible. The reasons most often cited are the Amazon Affect,
Artificial Intelligence, weak wage growth, years of excess capacity, and transitory factors like the mobile phone price war in March 2017.

For several years, the U.S. economy has produced a “Goldilocks” combination (neither too hot nor too cold) of solid growth with limited inflation. The absence of price pressures, even at very low levels of unemployment, has surprised many observers.

While investors are justifiably focused on what may be the opening crescendo of a long overdue sell-off in stocks, there is not, as of yet, as feverish a discussion of the parallel sell-offs in bonds and the U.S. dollar, which have been underway for at least a year and a half in bonds and 14 months for the dollar.

Rarely do we move directly from boom to bust; but when the shift comes, it can develop quite quickly, even though the transition isn’t usually obvious in real time. As I look at the data and talk to my contacts, I’m beginning to conclude that we’re approaching one of those transitional phases. I think we’ll look back at 2018 as an in-between year… from good times to something eventually not so good.

On the campaign trail, then-presidential candidate Donald Trump pledged to invest as much as $1 trillion in U.S. infrastructure if he were elected. This week during his first State of the Union address, now-President Trump added half a trillion dollars more to that figure.

We expect policy will continue to drive municipal bond markets in 2018, if more constructively than in 2017. Municipal investors may remember 2017 as the year of unrealized policy fear. While the threat of tax reform and its potential to reduce the value of the muni exemption for retail investors ­loomed large, ultimately it had little impact on individual municipal bonds.

There is an old saying on Wall Street that the markets climb a “Wall of Worry.” The past quarter and year certainly had several concerns, but the markets continued higher and finished the year at all-time highs.

Stocks have ripped higher to start the year and “melt-up” has become a popular descriptor; but it’s time to judge whether the flame’s too hot.

We are at an interesting point in this economic and capital market adventure we have been through for almost ten years. We hesitate to use the word “cycle” because that implies that economic activity, measured by the output of our country, and in turn the capital markets, would actually turn down.

Conferences can be great fun and the final evening usually ends with a gathering at the hotel bar. This year’s Inside ETFs Conference ended with a bang for me. Sitting outside on a couch, 72 degrees, clear sky and comfortably positioned between the hotel bar, pool and ocean, daughter, Brianna, snuck up on me and grabbed the wine from my hand.

Economic recovery is in full swing but investors should remain vigilant of the long-term risks.

Optimism is pervasive regarding U.S. economic growth in 2018. Based on the solid 3%+ growth rate during the last three quarters of 2017, this optimism is well-founded.

Many investors think that this bull market and economic expansion have gone on long enough and a bear market and a recession will take place soon. In my view, we have at least a year or two before the next major downturn in either the market or the economy, barring a major geopolitical conflict such as a shooting war with North Korea, Russia or Iran.

Integrating ESG into sovereign risk analysis adds a holistic and long-term perspective that is aligned with investing in sovereign fixed income.

Years ago we published a report on nuclear war and civil defense. Since then, we have seen an increase in actual and potential nuclear proliferation. Recent US administrations have reviewed their policies on nuclear weapons and we are seeing a departure from the late Cold War thinking on nuclear policy.

Travel to clients abroad and preoccupation with my coming book on cycles (final draft submitted just the other day) have combined to keep me from writing a memo since September, but fortunately not from thinking. Thus I have ideas to set down on two significant subjects: the market environment and the new tax law. Further, I’m highly motivated to do so, since if I skip a few months, people start writing in, “Are you sick?”

In this far-reaching interview, Jack Bogle comments on the future of index funds, argues that the value premium has been arbitraged away and attacks publicly-held mutual fund companies.

In a number of places around the world, it’s an exciting time to be a taxpayer — or tax attorney. That’s because a variety of countries have brought or are bringing tax cuts to fruition.

Whatever business you might be in, you’ll probably agree with me that a critical key to your success is sales. Of course, you need great product, great team members and grit. But with great product and no sales… No success.

Imagine this: Rising interest rates and reduced foreign capital flows combine to push housing prices down in places like Vancouver. Leveraged players who own speculative homes start to liquidate their properties, pushing prices down further. Banks find themselves holding properties they neither need nor want. The dominoes begin to topple.

In sum, while there are certainly signs of excessive risk-taking in some areas, we feel that they are not systemic risks such as we saw in 2008. A healthy tailwind to corporate profit growth aided by the recent corporate tax rate cuts means that we will not likely see signs of economic weakness for a few years.

Those of you who have been following us since 2010 will identify us a perma-bulls. Even in the depths of the ECRI 2012 /Hussman recession calls we were firmly bullish on the US economy and stock market – quite contrary to the popular consensus at the time.

Since the dawn of time music has played a pivotal role in the defining of the times and the progression made. We would like to utilize the artistic genius of these maestros to bring some context to the current pivotal point in the economy and capital markets.

In the 9th year of this bull market, investors remain overweight bonds in an environment poised to drastically limit fixed income returns. It’s time to avoid bonds’ day of reckoning.

Templeton Emerging Markets Group has a wide investment universe to cover—tens of thousands of companies in markets on nearly every continent. While we are bottom-up investors, we also take into account big-picture context.

The economic calendar is normal, with a holiday-shortened week and some ongoing political worries. Competing with the Washington Circus will be Q417 corporate earnings reports. The former topics will have greater news interest, but investors should be digging into the earnings reports.

At the height of this eight-year bull market, we are trying to reconcile the notion that the markets and the global economy may be “as good as it gets” with the potential that as a result of technological change and increased market volatility, “the best may be yet to come.”

At the beginning of every year, we update what’s typically one of our most popular pages, the Periodic Table of Commodity Returns. I encourage you to explore 10 years’ worth of data on basic materials such as aluminum, zinc and everything in between. A word of warning, though—the interactive feature makes the table highly addictive.

Only two weeks in and 2018 is already breaking records – mostly in a good way. But that leaves 50 potentially less enjoyable weeks to go. So rather than focus on promising current events, I think I’d better dip back into my annual forecast bag and share a few more highlights with you.