The following is Sit Investment Associates' quarterly global outlook and strategy summary. This summary contains the collective opinions of our analysts and portfolio managers and is provided for informational purposes only. At the end of each calendar quarter, the full publication is available. While the information is accurate at the time of writing, such information is subject to change at any time without notice, and therefore, so may the investment decisions of Sit Investment Associates.

Global Outlook and Strategy

July 11, 2017

In June, in contrast to trends that had held for most of 2017 in the U.S., value stocks tended to outperform growth stocks and small capitalization indices generally outperformed their larger cap counterparts. This reversal may be partially viewed as a modest shift to "risk-on," but also as a "catch-up" subsequent to the strong outperformance of both large cap and growth-oriented indices for most of the first half of the year. 

We believe current fundamentals support sustained U.S. real GDP growth of +2.0 percent to +2.5 percent in 2017 and 2018, with potential upside from pro-growth policy shifts. Although the pace of GDP growth continues to lag that of previous business cycles, the current expansion could prove to be the longest on U.S. record given the absence of meaningful excesses or overheating that have historically precipitated a recession. The Trump administration’s policies have the potential to provide a boost to economic growth if effectively implemented.  However, the range of potential economic outcomes continues to be wide as Washington remains bogged down by partisan conflict and the Federal Reserve is preparing to unwind its bloated balance sheet. As a result, we believe a diversified, barbell strategy provides the most favorable risk/reward profile for equity portfolios at this stage.  We expect the Fed to continue raising the target Fed Funds rate until they reach the 2 percent level sometime next year. In conjunction with the rate increase in June, the Federal Reserve outlined fairly detailed plans to reduce its $4.5 trillion balance sheet. We expect the Federal Reserve’s balance sheet reduction program to begin this fall and expect the reduction of their balance sheet to push interest rates up by about 0.5 percent over the next 12 to 18 months. There is likely some pain to be experienced in the markets as the process unfolds. Interest rates will be higher, but we believe this will occur mainly in the short end of the curve as the yield curve continues to flatten. We expect economic growth to continue at the current pace, allowing the Federal Reserve to continue its path to "normalization." 

For more details, including a longer discussion on the recent low volatility of financial markets, please see Sit Investment Associates' July 2017 Global Investment Outlook and Strategy paper. Click here: Global Outlook and Strategy (Adobe Acrobat) or e-mail us at: siainfo@sitinvest.com.

 

July 24, 2017




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