Financial markets have shown remarkable resilience so far this year, despite political tensions in the U.S. and abroad and inconsistent economic data. The U.S. stock market has also been remarkably calm, with the VIX — a gauge of equity market implied volatility — near decade lows.

While risks haven't disappeared, we expect the combination of slow growth, low inflation and a gradual shift in monetary policy will support modest equity gains and a gradual rise in long-term rates.

1

Sustained Global Growth

After initial signs of slowing growth at the start of the year, recent economic data have been solid. Growth is broadening globally and inflation is muted. Our overall expectation is that global growth (GDP) comes in around 3.5% this year and next.

2

Inflation Not Expected to Accelerate Meaningfully

Although economic growth is improving, inflation is muted in most developed and emerging economies. U.S. core inflation, which strips out volatile food and energy, has come down from its first quarter peak and now stands at 1.7% year over year.

3

Equity Markets Remain Strong

Equity markets continue to flirt with all-time highs due to stronger corporate earnings, improved sentiment and encouraging economic data. We expect that stronger earnings and revenue growth will play a critical role in pushing equity markets higher from today's levels.

4

A Modest Rise In Interest Rates

A pickup in global growth means central banks beginning to unwind their extremely accommodative monetary policies. The Federal Reserve is expected to slowly normalize short-term interest rates and begin to outline a plan to unwind its balance sheet. Both the European Central Bank and the Bank of Japan have grown their balance sheets significantly to fight deflationary forces, and indicated they will soon reduce stimulus.

5

Outlook Generally Optimistic, but Be Careful Not to Extrapolate

We remain positive on market fundamentals, see opportunities across asset classes and believe that the long bull market has further room to run. That said, we don't assume that the strong returns seen in the first half of 2017 will necessarily continue.

We will continue to monitor risk and make active decisions to navigate global markets
Slow, Steady Growth for 2017 and Beyond

Strong manufacturing combined with a solid labor market, business and consumer spending, and elevated consumer confidence should support continued growth during the second half of the year. We expect the U.S. economy to expand at an annualized rate of 2.2% in 2017, and about 2.5% next year — assuming some stimulative tax policy is passed in the first quarter.

Position Portfolios for a Long Expansion

We continue to favor equities over bonds within a diversified portfolio. While we believe bonds provide a necessary source of income and diversification, we have modest return expectations for the asset class as a whole and see greater opportunity for gains in equities. We continue to favor domestic equities, with exposure across capitalization, remain positive on non-U.S. developed markets and have also reallocated to emerging markets.

Diversify to Protect Against Uncertainty

There are several factors that could cause markets to pause or consolidate, including further delay in passing meaningful legislation in Washington D.C., a policy mistake by central banks, upcoming elections in Europe, growth disruptions in China and escalating tensions with North Korea. The incorporation of diversifiers and customized strategies for hedging downside risk and/or interest rate risk can help buffer against these uncertainties.

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