The global economic picture brightens

For the first time in years, the world's major economies all appear to be on the road to recovery. Heading into the second half of the year, clarity is improving on many fronts, but questions remain: Can U.S. markets sustain their winning streak? Will Europe finally turn the corner? What will rising rates mean for investors? And will politics upend everything? Here are four key themes and investment implications to consider as you position portfolios for the balance of 2017 and beyond:

Takeaways
/Implications

The global economic picture is brightening

Global equity markets should benefit from improving economic activity

Market trends suggest better values may be found abroad

Consider selectively adding to investments in Europe and emerging markets

Interest rates are gradually rising

Bonds should still play a key risk-dampening role in most portfolios

Fundamentals trump politics

Global diversification can help offset localized political risk

Economies

Across the Globe, Momentum Builds

The global recovery is gaining momentum. Nowhere is this more evident than in the U.S. - where the economy is firing on most, if not all, cylinders. This should be supportive of equity markets barring any unexpected shocks or policy missteps.

GDP % Estimated

Source: International Monetary Fund, World Economic Outlook Database, April 2017. 2017 GDP figures are estimates.

"The world has shifted and today it feels like global growth is in ascendance. But with that comes higher valuations, especially in the United States. In my portfolios, I am finding it easier to identify attractively valued companies abroad."

Steve Watson
Portfolio Manager

Markets

Market Levels Suggest It May Be Time to Rebalance

Market capitalization levels around the world show the U.S. approaching an all-time high while overseas markets are near all-time lows. The outlook for European markets has markedly improved. China is stabilizing and emerging markets are rallying. Given the valuation gap between the U.S. and everywhere else, isn't it time to consider rebalancing portfolios toward non-U.S. markets?

% Allocation of MSCI ACWI Ranges - Last 20 Years

Sources: MSCI, RIMES. Market capitalization ranges represent each region's percentage of the total market capitalization for the MSCI All Country World Index for the 20 years ended 5/31/17.

Rates

Interest Rates Are Rising ... Gradually

It's clear that rates are moving higher, but the pace of further increases should be modest. Global monetary policy remains extremely accommodative and the Federal Reserve has historically hiked rates at a slower pace than its own projections suggest. Bond exposure continues to provide important diversification benefits in a well-balanced portfolio. With inflation on the rise, consider investing in Treasury Inflation-Protected Securities.

Interest Rate Changes by Major
Central Banks Since 2013

Sources: Central bank websites, FactSet as of 6/14/17.

Politics

Fundamentals Trump Politics

Election results over the past year leave no doubt - political uncertainty is alarmingly high. But financial markets have kept calm and carried on. Why? Because investors are looking through the fog of uncertainty and focusing on the fundamentals: corporate earnings growth, economic activity and relative valuations. Politics may help or hinder markets at times, but the underlying fundamentals are what matter the most.

Political Uncertainty and Market Volatility

Sources: Thomson Reuters as of 5/31/17. Global volatility is the average of the VIX and VSTOXX Indexes, which represent equity volatility in the U.S. and Europe, respectively.

"Fading political uncertainty in continental Europe has enabled investors to concentrate on what's important: the underlying fundamentals. Companies in the euro zone are seeing a significant improvement in earnings growth, which reflects a stronger macroeconomic environment. After a protracted period of underperformance, there is scope for further relative gains in euro-zone stocks."

Robert Lind
Economist

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