Stocks have rallied strongly in the new year. Is the rally justified? And what is the outlook from here? Let's take a closer look.
A key to our improved outlook for risk taking has been how gloomy investors have become about the outlook for global growth. Economic releases this year have shown better momentum in the US. While European and Asian reports have been more mixed.
Strong job growth in the United States alongside a jump in new orders and manufacturing support the solid growth outlook. This has been corroborated in the credit markets, where spreads on investment grade and high-yield bonds have narrowed meaningfully this year. We'll be carefully watching progress in China, where the government's policy actions have yet to definitively stabilize growth. But we expect improvement in the second half of the year.
The dovish tilt emanating from the Federal Reserve late last year shifted into a more full-throated position at the January Fed meeting. In addition to espousing patience on the interest rate outlook, the Fed has signaled that its balance sheet is likely to be larger for longer than some feared. The Fed's shift is meaningful, and other central banks are following a similar script.
A key driver of our outlook is the benign inflation picture. In fact, inflation is stuck in most developed economies. And this is not only a fundamental concern for central bankers, but also supports a cover for more dovish policy. We're also seeing these trends across emerging markets, where falling inflation across countries such as India is leading to easier monetary policy.
So what does this mean for investors? With it, the outlook of steady growth with low inflation will support risk taking over the next year. Our risk cases include a cyclical jump in inflation, which could restart the Fed's hiking campaign, and a policy error, such as deterioration in the US-China trade negotiations. Overall, we continue to favor US equities and high-yield bonds, which we expect to benefit from strong economic growth and renewed investor risk appetite.