All the major asset classes have delivered solid returns so far this year, even in the face of intensifying geopolitical tensions and slowing global growth. As we begin the second half of the year, what will the global economy and markets hold for investors?
Strong labor markets, well-contained inflation and healthy consumer spending, especially in the U.S., should support the continued global expansion albeit at a slower pace. Our forecast is for a synchronized slowdown in growth. Still, the risk of a prolonged U.S.-China trade dispute could weaken our outlook.
Slowing growth, tepid inflation and continued trade uncertainty caused the Fed to put rate hikes on hold at its June meeting. Weaker-than-expected inflation readings and a decline in inflation expectations have led major central banks around the world to shift to a more accommodative stance.
As long as global rates stay low, U.S. rates will likely remain low as well. We could see longer-term rates in the U.S. move lower before moving higher if risk-off sentiment ensues following a further deterioration in trade negotiations and/or other geopolitical tensions.
In light of the potential impact of slowing growth and trade tensions on earnings and profit margins, we have lowered our year-over-year earnings forecast for the S&P 500. Still, earnings fundamentals are solid and could surprise to the upside if we see some progress on trade.
Even in the midst of uncertainties, the global expansion can continue (albeit at a slower pace), supported by a strong labor market, well-contained inflation and more accommodative monetary and fiscal policy.
Although we recommend a small underweight to fixed income, the asset class should continue to provide a source of stability during periods of equity market volatility. We maintain a neutral posture to equities and favor the U.S. Global diversification remains important, but we continue to maintain a neutral weight to developed international equity and underweight to emerging markets, as this asset class tends not to dominate this late in an economic cycle.
With an expected increase in volatility, we continue to have a small overweight to diversifiers due to their lower-correlation to stocks and bonds and their ability to smooth the ride.
Maintaining a balanced, well-diversified portfolio and rebalancing toward those targets, if the market takes them off course, will be important for investors as we navigate this extended cycle.
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Leo P. Grohowski is chief investment officer of BNY Mellon Wealth Management. He leads all investment strategy and investment management functions for the wealth management organization, and is chairman of the Investment Policy Committee. Leo is also a member of BNY Mellon's Operating Committee, Benefits Investment Committee, and the Investment Ethics Council.View Profile