According to global economist Chris Watling from LongView Economics in London, his synopsis of the current market is summarised in the following two points –

  1. The US and global economy is, in many respects, at the early stages of this economic cycle and is about to boom on the release of pent up demand as supply chain tensions start to ease. That supports the case for a continued uptrend in bond yields and global equities.
  2. Despite the changing inflation and interest rate backdrop, the global economy and equity markets are still at the early stages of the liquidity cycle . As such, and while inflation is a key risk (amongst other factors), the liquidity environment remains supportive of risk assets, at least over the next 6 – 12 months, and potentially beyond.

Investors are wondering – Do I retreat or do I attack?

Given the structural strength of the US corporate sector (e.g. high profit share & high cash levels, as well as cash flow), and given record high confidence, we expect companies to start putting their spare cash to work by rebuilding inventories, creating jobs and so on.

The stage is set therefore, for a phase of ‘boom like’ economic growth in the West. In particular, we expect the end of the pandemic, and the easing of global supply chain (and production) challenges to be a key catalysts for that strong growth outcome. In addition, and despite the current slowdown in the Chinese economy, the global outlook is still strong.

Reweight your portfolio’s now.

The US and global economy are still at the early stages of the liquidity cycle. Usually, as the Fed and other central banks embark on rate hiking cycles, liquidity is withdrawn from the banking system/economy and money begins to tighten up. At some stage, the Fed and other central banks then over-tighten policy (and/or there’s a shock), which results in recession (or a marked growth slowdown/mid-cycle slowdown). There is likely to be cheap money for the next two years.

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