Trade, taxes and rising protectionism continue to dominate headlines and cause market volatility. How could these issues play out and impact the global growth story moving forward? Will this uncertainty result in a bumpy ride for investors in the months ahead or will strong growth fundamentals win out?

At BNY Mellon Wealth Management's May 2018 Newport Beach event, chief investment officer Leo Grohowski moderated a panel of policy and investment experts as they discussed these topics and more. An abstract of our panelists' unique views, forecasts and thoughts on how to take advantage of opportunities or guard against risks is provided below.

1

What is the state of the current political environment and how does it impact financial markets?

Dan Clifton, Partner and Head of Washington Office for Strategas: There is a fair amount of uncertainty in the direction of U.S. economic policy, clearly — a variable we know has an impact on market volatility. In 2017, financial markets were extraordinarily calm as the Trump administration had a clear focus: passing new tax legislation. That defined agenda led to a period of low volatility in the markets. Now that the tax law has been finalized, there is a lack of clear policy direction being pursued and that uncertainty has contributed to a higher level of volatility in 2018.

2

So far, 2018 has provided an important reminder about how quickly volatility can return to markets. Is this something investors should be prepared for, in your opinion?

Sinead M. Colton, Managing Director, Global Investment Strategist at BNY Mellon: Realized volatility in the past five years was less than 10%, which was extremely low when compared with prior years. Investors were reminded how quickly volatility can re-emerge after January's payroll report was released. The higher-than-expected wage-growth figure triggered fears that inflation was rising faster than expected and could lead to higher interest rates and a more aggressive central bank.

We do expect volatility to move higher in the next 12–18 months, which will likely create greater performance differences between individual stocks and sectors. This backdrop favors an active management approach to investing, as active managers have an opportunity to take advantage by identifying mispriced securities. Investors who are concerned about the increased volatility should consider decreasing market exposure if their portfolio is not aligned with their risk tolerance and specific objectives.

3

We've seen a very weak dollar over the past year or so, which has boosted returns from international assets for many investors. Should we expect this to continue?

Sinead Colton: The weak dollar has boosted returns for international assets. It is yet to be seen, but if the U.S. were to pursue a weak-dollar policy it could make the country more competitive in the worldwide market. Dollar-based returns have made some international markets more attractive, like the U.K., Spain, France and Japan, though we are less bullish on Japan than we have been in the recent past. Equity prices are determined by discounting expected future cash flows.

The market seems to be pricing future earning streams in international economies at a discount. If you are going to invest in foreign markets with the underlying currencies "unhedged," your return is based not only on stock-price movement but also on changes in the value of underlying currencies (exchange rate risk).

For example, if you were to invest in a German company, you would be investing in euros and all returns would be euro-denominated. If a U.S. investor had invested in the German markets last year, they would have seen a total return of 25%. However, only 5% of that return would have been from actual market appreciation. Approximately 20% of the return would have come from the appreciation of the euro.

4

How much of tax reform is priced into the bond and equity markets at this point?

Dan Clifton: Tax reform will have multiple effects on the economy. We have already seen the positive impact of corporate tax cuts on earnings during the first quarter reporting season, with S&P 500 companies delivering a blended, year-over-year earnings growth of 25%. This boost in earnings was already largely priced into the market, however. Repatriation of dollars for U.S.-based companies is the next effect, which we have only seen part of at this point. We expect approximately $480 billion dollars to come back to the U.S. through repatriation and we've already seen $80 billion has come back this year.

The money that comes back can be used in many ways, which will continue to help the economy depending on how companies choose to use these funds. Two notable options that companies could use these funds for are paying dividends, which will be taxed, and buying back stock shares. When a company buys back a stock, the investors will pay the embedded capital gains in stock appreciation.

5

What impact might tariffs have?

Dan Clifton: We've seen economic growth expectations decline some as tariff discussions have increased. Historically, tariffs have hurt the growth rate for the countries involved because resources are not flowing to where they are most efficient.

The first set of tariffs discussed this year involved tariffs on steel and aluminum. The danger to imposing tariffs is that they potentially could result in deflationary effects. The worst case scenario is that all tariffs will cost approximately $80 billion dollars. This is small compared to the $800 billion in tax receipts as a result of tax reform.

6

The federal budget deficit and debt is increasing. How worried are you over the deteriorating fiscal condition of the U.S.?

Dan Clifton: The growing federal budget deficit is a concern over the long term. The key ratio to look at when talking about the fiscal deficit is the debt-to-GDP ratio, which is currently over 70%. That ratio is projected to increase to 100% in 2027, which is concerning. Realized capital gains for 2016 and 2017 should help slow the growth of deficit expansion. Over the next year, expected increases in merger and acquisition activity and share repurchases should result in favorable increases of tax revenue; however, this will not be enough to offset the growth in our deficit.

7

When do you think the next recession will be?

Dan Clifton: I view the yield curve as an important guide to signaling the next recession. We should expect a fifth rate hike by mid-2019. At that point, the yield curve may invert. When the curve does invert, we should expect to see a recession in the next 12–18 months, based on historical data.

Policy and politics are constantly shifting and can clearly have an impact on economic growth, sentiment and the markets. While the current political environment is a source of added uncertainty for investors, fundamentals around the world remain solid,
underpinned by robust earnings growth, muted inflationary pressures and gradual monetary tightening. The U.S. expansion is now the second longest in U.S. history, and although long, we believe it has further room to run.

The re-emergence of market volatility is likely here to stay, however, with trade, politics and policy posing potential headwinds. Investors should look beyond short-term news headlines, focus on fundamentals and take advantage of long-term opportunities market dislocations often provide.

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