Five things to watch out for: Lockwood
April 10, 2018

BNY Mellon's Lockwood Advisors, Inc has just issued its first quarter Investment Insights, highlighting key trends to watch for the rest of the year. 

"2017 was an unbelievable year in many respects," said Matthew Forester, Chief Investment Officer, BNY Mellon's Lockwood Advisors. "Markets across the globe were up and volatility was at its lowest levels—all adding up to highly unusual conditions that are hard to replicate. 

"In the first quarter, we saw investors seemingly getting nervous and reacting quickly and strongly to any news item that has the potential to move markets. If volatility continues to increase, it could damage this long-standing bull market. And although we see the shorter-term trends to be intact and we have not yet seen the business cycle turn, as markets quicken their pace in reacting to events, we remind investors to stay cautious and review their asset allocation strategies with their advisors."

In the report, Forester outlines five key areas he believes investors should be paying attention to and discussing with their advisors:

Return of volatility – The trend towards higher inflation looks real at this moment. However, it appears it will not be as abrupt as markets feared in February. There are a few other concerns that may contribute to increased volatility in the markets, including the lateness of the economic cycle, the degree of complacency in market positioning (structural or explicit short volatility bets) and the worries concerning trade policy.

Trade worries – Restrictive trade policy is stagflationary (reductions in output and increases in inflation). So, if the market begins to demonstrate a fear of serious retaliatory trade measures, it will not help either stocks or bonds. Moreover, current administration policy (fiscal stimulus) will likely exacerbate concerns about the twin deficits arising from a current account deficit and fiscal deficit.

Interest rates – Even though the US economy has seemingly hit a bit of a soft patch, as gross domestic product expectations for the first quarter continue to decline against early forecasts, these one-off issues are unlikely to derail the Federal Reserve (the Fed) from hiking interest rates throughout the year, as the new band for Federal Funds (1.50-1.75 percent) is still under current inflation readings. 

Fed moves in outer years – Under new leadership, the Fed has taken its forecasts for growth in 2019 and 2020 up a notch and communicated expectations for additional rate hikes. In all years since the crisis, the Fed has had to come down to the market expectations for rate hikes. This year, though, the market has begun to believe the more hawkish tone from the central bank. It will be interesting to see how the market or the Fed adjusts in the outer years of 2019 and 2020.

Politics at play – The outcome of mid-term elections could alter or reverse recent tax cuts and potentially raise the prospects for impeachment. Meanwhile, markets will likely have to absorb whatever results from the Russia probe led by the Special Counsel. All these items will make it more difficult to assess future policy directives from Washington and could also disrupt already touchy international discussions around trade.

"As we expected, 2018 has so far looked like a more sobering year than 2017," adds Forester. "Risk factors could express themselves quickly, loudly and abruptly. The tax cuts could help give US equities a tailwind, but there are numerous risk factors at play as the year moves along. We typically advocate focusing on the long-term, but paying some attention to the medium-term risk factors could help foster a more successful navigation of 2018."





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BNY Mellon's Lockwood Advisors, Inc has just issued its first quarter Investment Insights, highlighting key trends to watch for the rest of the year. 

"2017 was an unbelievable year in many respects," said Matthew Forester, Chief Investment Officer, BNY Mellon's Lockwood Advisors. "Markets across the globe were up and volatility was at its lowest levels—all adding up to highly unusual conditions that are hard to replicate. 

"In the first quarter, we saw investors seemingly getting nervous and reacting quickly and strongly to any news item that has the potential to move markets. If volatility continues to increase, it could damage this long-standing bull market. And although we see the shorter-term trends to be intact and we have not yet seen the business cycle turn, as markets quicken their pace in reacting to events, we remind investors to stay cautious and review their asset allocation strategies with their advisors."

In the report, Forester outlines five key areas he believes investors should be paying attention to and discussing with their advisors:

Return of volatility – The trend towards higher inflation looks real at this moment. However, it appears it will not be as abrupt as markets feared in February. There are a few other concerns that may contribute to increased volatility in the markets, including the lateness of the economic cycle, the degree of complacency in market positioning (structural or explicit short volatility bets) and the worries concerning trade policy.

Trade worries – Restrictive trade policy is stagflationary (reductions in output and increases in inflation). So, if the market begins to demonstrate a fear of serious retaliatory trade measures, it will not help either stocks or bonds. Moreover, current administration policy (fiscal stimulus) will likely exacerbate concerns about the twin deficits arising from a current account deficit and fiscal deficit.

Interest rates – Even though the US economy has seemingly hit a bit of a soft patch, as gross domestic product expectations for the first quarter continue to decline against early forecasts, these one-off issues are unlikely to derail the Federal Reserve (the Fed) from hiking interest rates throughout the year, as the new band for Federal Funds (1.50-1.75 percent) is still under current inflation readings. 

Fed moves in outer years – Under new leadership, the Fed has taken its forecasts for growth in 2019 and 2020 up a notch and communicated expectations for additional rate hikes. In all years since the crisis, the Fed has had to come down to the market expectations for rate hikes. This year, though, the market has begun to believe the more hawkish tone from the central bank. It will be interesting to see how the market or the Fed adjusts in the outer years of 2019 and 2020.

Politics at play – The outcome of mid-term elections could alter or reverse recent tax cuts and potentially raise the prospects for impeachment. Meanwhile, markets will likely have to absorb whatever results from the Russia probe led by the Special Counsel. All these items will make it more difficult to assess future policy directives from Washington and could also disrupt already touchy international discussions around trade.

"As we expected, 2018 has so far looked like a more sobering year than 2017," adds Forester. "Risk factors could express themselves quickly, loudly and abruptly. The tax cuts could help give US equities a tailwind, but there are numerous risk factors at play as the year moves along. We typically advocate focusing on the long-term, but paying some attention to the medium-term risk factors could help foster a more successful navigation of 2018."



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