Markets Stuck In First Gear Due To Weak Global Growth, Geopolitical Uncertainty And Fed Paralysis

Here’s What We’re Thinking

June 17, 2016

The current U.S. economic expansion cycle, which started in 2009, is the second longest on record. While we think there may be a couple of additional innings to play, stagnant equity market performance may be signaling that some investors have already started heading to the sidelines in anticipation of slower economic and corporate profit growth ahead. There are, however, many differences between the current cycle and previous ones, namely that interest rates remain exceptionally low and increased globalization has introduced additional variables. Theoretically and practically speaking, interest rates are the key building blocks of equity valuation, with lower rates associated with higher equity valuations and vice versa. With global interest rates so low and central bankers apparently paralyzed to raise them lest they choke off the tepid pace of growth, the tug of war in the marketplace may be a reflection of some investors willing to pay higher multiples for equities while others believe potentially higher rates ahead could result in lower equity prices.

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