EC Cash Makes A Comeback

Our outlook for real interest rates is 30-40 bp higher across fixed income sectors relative to the end of 2017. But the key change to the fixed-income markets is not the level of rates, but the fact that the yield curve is now essentially flat. Of note, our outlook for longer-dated bonds is little changed from the middle of 2017.

This argues for more ultra-short bonds and money market instruments in client portfolios. Each of our model portfolios has more cash equivalents than a month ago (by cash equivalents we mean interest paying obligations that mature in less than 1 year), with the sharpest increases occurring in our moderate risk tolerance portfolios (the most conservative portfolios had a lot of cash to begin with and the most aggressive portfolios have much smaller total fixed income exposure).

Amazingly, our long-term outlook for global equity market returns is practically unchanged from the start of the year. Strong price gains in January were followed by a sharp correction in early February that gave way to a modest rebound in recent days. The net result of all that price movement is stock valuations that are at a level consistent with continued improvement in the outlook for corporate earnings.

Long-Term Equity Market Return Outlook:

Projected Long-Run Annual Real Returns

Source: arcpointadvisor.com

Despite a brief correction to global equity prices earlier this month and a return to more normal levels of volatility, our outlook for future equity returns is little changed from the beginning of the year.  In effect, the modest net gains across equity markets YTD (through February 21st) have kept pace with continuing improvements in the outlook for corporate earnings and the benefits of a slightly weaker U.S. dollar.

Our forecast for U.S. large-cap equity returns implies average annual mid-cycle earnings of $128 for the S&P 500 index companies, up $2 from our prior estimate. This earnings outlook compares to the consensus bottoms-up forecast of $158 over the next four quarters for S&P 500 earnings.