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Market Volatility Remains Elevated

US equities suffered their worst week in more than two years last month on concerns that increasingly restrictive trade policies may disrupt global growth. Although US stocks recouped some of those losses the following Monday, the market gyrations on the heels of sharp swings seen in February highlight a clear uptick in equity market volatility relative to last year.

Our Perspective
Since late 2016, we observed that conditions were turning in favor of a pick-up in growth and inflation, driven by our expectations of higher business and government spending. A weak dollar became an additional tailwind, enabling global growth to become more synchronized than it had been since 2007.

We now believe that a more neutral overview is appropriate, where risks to economic growth are becoming more balanced.

In many respects, this stems from our belief that a more normal economic cycle is playing out, and the US economy specifically is moving further into later cycle territory. From a market perspective, we are no longer in a ‘rising tide lifts all boats’ environment. Sector and security selection will continue to be important, volatility will likely persist, and lower future returns should be expected.

Big Tech Blowback

News of data analytics firm Cambridge Analytica harvesting 50 million Facebook profiles to build a system for influencing US voters has sparked growing data security and privacy concerns. As a result, several major US tech super caps, including Facebook, face fresh regulatory threats both at home and abroad.

Our Perspective
We have closely monitored user backlash and regulatory risk. The negative news flow is likely to be a headwind on near-term user growth and engagement; however, the data suggests Facebook remains a “sticky” service with minimal user defections. On the regulatory side, while there is clearly increased risk, we view the level of risk as being low and manageable.

FDA Targets Tobacco

The FDA has released two Advanced Notices of Proposed Rulemaking (ANPRMs) looking at nicotine reduction and the role of flavors in tobacco products. The ANPRMs are the first step in what is likely to be a long regulatory process (at least 5-10 years).

Our Perspective
Though we see nicotine reduction as a longer term possibility, we believe the most likely near-term outcome is the FDA restricting e-cig flavors that appeal to youth (cherry, candy, etc.), which would mostly impact independent brands.

Brexit Can Kicked Down Road

The UK and EU agreed to a conditional 21-month Brexit transition that extends Britain’s participation in the EU single market and customs union until December 31, 2020, so long as a final withdrawal treaty is signed next year.

In negotiating the agreement, Britain offered the EU sovereignty concessions in exchange for stronger assurances that it would avoid an exit without a formal withdrawal accord.

Our Perspective
We view the conditional agreement as little more than both sides biding more time to negotiate a trade deal. It also appears as if the EU is not compromising, and that the UK seems to be backing down on most of their key Brexit issues without getting anything significant in return. Recent developments indicate that reaching an acceptable trade deal is expected to prove difficult.

Our View
Economic Cycle		US moving further into later cycle territory, but few signs of excesses or extreme speculation indicative of imminent recession; internationally, position in the cycle varies by country/region
Growth		Nominal global growth continues to churn higher led by a noticeable pick up in capital spending & business investment; global growth is synchronized and steady, but we expect the pace of growth to plateau near current levels; growing indications of “peak” soft data but no obvious imbalance in the drivers of end demand
Inflation		Expect upward pressure on inflation as the economic cycle progresses amid robust employment markets, firming wage pressures, and the end of downward inflationary pressures brought on by the sharp decline in commodity prices
Interest Rates		We remain in a fairly stimulative environment with healthy credit conditions; our growth outlook, inflation outlook, and governments shifting from monetary to fiscal policy supports interest rates gradually moving higher
Potential Risk Catalysts		Trade protectionism; central bank policy missteps; China’s economic transition and managed deceleration; corporate profitability; geopolitics
Valuations		Equity valuations are stretched relative to history, with select pockets of opportunity in international markets; developed market fixed income mostly overvalued, while local currency emerging market bonds are more attractive
Equities		Prefer fundamentally strong, innovative businesses with unique growth drivers that allow them to generate their own growth in a slow-growth world; select exposure to economically-sensitive names
Fixed Income		Corporate bonds continue to adequately compensate investors on a fundamental basis; US Treasury valuations have moved closer to fair value amid rising interest rates; continue to believe a modest duration remains in investors’ best interests

Indicates change

Source: FactSet. Analysis: Manning & Napier Advisors, LLC (Manning & Napier).

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