Executive summary

  • Equity markets started the year strongly, supported by the ongoing favorable economic climate and search-for-yield. However, in February and March markets became turbulent and declined, triggered by fears of inflationary pressures, the likelihood of an increased pace of monetary tightening in the US and increasing trade tensions between China and the US.
  • These disappointing returns cause some short-term return reversal effects and improve our positive momentum outlook. However, we expect that the increased market volatility seen in the first quarter remains present in the short-term.
  • The first quarter of 2018 may go down in history as the period in which the first “cracks” in the positive momentum and confidence appeared. It is for the first time in years that we now observe a signal that we have passed a peak in the global business cycle, as measured by the Ortec Finance Business Cycle Indicator.
  • As the natural progression of the business cycle continues, we anticipate a likely decrease in expected returns as cyclical measures normalize. This leads to an outlook with lower prospective returns for the medium term.
  • But just as any aspect of our outlook, this more sober medium-term outlook is highly uncertain and therefore also offers some upward potential. For example, we see a probability of about 20% that the business cycle will not yet turn negative within 2 years and a probability of almost 10% that it has not yet turned negative even after 3 years.

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