Unlike the start of 2018, when economies around the globe were delivering synchronized growth, we expect the long global expansion to endure but transition to a slower pace.

The relative deceleration in growth is due in part to the fading of U.S. fiscal stimulus and the reduction of financial liquidity as other central banks join the Fed in tightening monetary policy. But with inflation expected to remain contained and our projection of interest rates moving only modestly higher, solid earnings growth should support equity markets.

1

Global growth slowing, but no sign of recession

We forecast real global gross domestic product (GDP) to slow from 3.7% in 2018 to 3.5% in 2019. In the U.S., growth will likely moderate, from the projected real GDP growth of 3.0% in 2018, to trend growth of near 2.0%. While the global expansion is set to slow and risks are emerging , we do not expect these headwinds to threaten the broader expansionary theme in 2019.

2

Central Banks continue monetary tightening

The sustainability of the long expansion will undoubtedly depend on the actions of central banks. While other central banks are likely to gradually withdraw easy monetary policy, the Fed’s recent shift in rate projections aligns with our expectations of a pause in 2019 with only two, or possibly fewer, rate hikes.

3

Yield curve flattens as rates drift higher

We expect 2019 to be similar to 2018: a flattening of the yield curve with the long end of the curve moving up less than the short end. We also expect a modest widening of credit spreads as growth slows.

4

Moderate equity returns

Corporate earnings growth for 2019 is expected to slow globally as tax benefits fade and companies manage higher input cost and wage pressures. While not as robust as 2018, we still expect S&P 500 companies to deliver a year-over-year earnings growth rate of 5-10%, which should translate into an operating earnings range of between $165 and $175. Earnings, rather than multiples, should support equities markets.

5

Persistent volatility amid trade, growth and political worries

The market volatility that appeared this year should continue, as uncertainty around monetary policy, trade, and potentially disruptive geopolitical events persists.

Diversification, discipline and flexibility critical
We're generally optimistic, but risks increasing

Overall, we are generally optimistic about the macroeconomic backdrop of slower growth, contained inflation and modestly higher interest rates, and see little sign of recession over the next 12-18 months. However, this mid-to-late cycle stage now calls for a more balanced approach to portfolio positioning that allows for flexibility given the increased risks.

Incorporate diversifiers

Our slight overweight to diversifiers (investments that don't move in the same general direction as stocks or bonds) has provided a buffer to market volatility without the interest rate sensitivity of fixed income and should continue to play a role in portfolio diversification. Customized hedging solutions may also provide a complement to a well-diversified portfolio for investors who desire more downside protection.

Take a more balanced and flexible approach

While the later stage of market cycles require a more balanced and diversified approach to investing, they can still be modestly rewarding for investors willing to withstand the higher volatility that often accompanies them. Investors should ensure that their long-term investment plan aligns with their risk profile and goals.

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