Trends Watch: Economics and Markets Outlook

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Brett Palatiello, Principal, Spring Valley Asset Management.

What is your outlook for alternatives?

While we believe alternatives are always important components of a diversified portfolio, the current environment provides some compelling reasons to consider, or increase, allocations to the alternatives space.

With valuations near record levels, expected returns on stocks and bonds are low. Therefore, it is increasingly important to have exposure to uncorrelated sources of return. In addition, given the geopolitical and economic environment, the sensitivity of global equity markets to adverse conditions has intensified. In the intermediate term, we believe that if tensions are resolved or growth comes in above expectations, equity markets can deliver outsized returns to the upside. If not, however, the equity markets can experience a significant decline.

What is your outlook for the economy?

Bolstered by consumer spending, expansionary fiscal policy, and now more accommodative monetary policy, the U.S. economy has demonstrated the most resilience. However, domestic investment is hampered by the trade war and the potential outcome of the 2020 election. We believe real GDP growth will remain around 2% with inflation running at, or below, the Federal Reserve’s target.

Globally, geopolitics and subdued growth continue to weigh on the economy. A further escalation in the trade war can slip a fragile global economy into recession. Alternatively, a comprehensive deal between China and the U.S. and the removal of tariffs could be the catalyst for meaningful, coordinated growth across the world.

While a narrow trade deal is possible in the near-term, fundamental disagreements on key issues will remain in the foreseeable future, preventing the prospect of a grand deal. Therefore, we believe global growth will remain tenuous, but above water.

In addition, though very difficult to use for market or recession timing, we are seeing some late-cycle behavior and potential imbalances. For example, stretched equity market valuations, an inverted yield curve and elevated levels of investment in R&D and nonfinancial business debt as a share of GDP. The lead times of these variables prior to an economic downturn have varied widely, however, and the length of time remaining in this expansion is far from certain.

What keeps you up at night?

As it relates to the economy, the trade war and unexpected inflation. While we believe a recession is unlikely right now, the global economy is experiencing a heightened vulnerability to adverse shocks. While a phase one trade deal could build some confidence and trust, it is unlikely to mitigate the seemingly irreconcilable differences involving the most pertinent issues. In addition, a persistent increase in inflation could compel the Federal Reserve to take a more hawkish stance on monetary policy. This could be exacerbated further if it isn’t associated with a commensurate increase in real growth.