12.07.2018
By Terry Flanagan

Market Outlook: Maybe Not So Bad

Recent market declines paint a bleak picture of the economy. But are things that bad?

Not really, said Win Thin, Global Head of Emerging Markets Strategy at Brown Brothers Harriman. Speaking Friday morning at the WBR Equities Leaders Summit, Thin suggested it would be a mistake to buy into the thesis of gloom delivered by the recent turbulence.

“We have a lot to worry about,” Thin said. “But I think the market is overreacting to what has been going on. The U.S. economy remains solid.”

Thin presented a “view from 35,000 feet,” emphasizing that the global investment climate will remain challenging in 2019, largely due to heightened political uncertainty. But a trade war can be defused, and compromises can be reached.

As long as the geopolitical situation settles down at some point, “the U.S. economic outlook is the 800-pound gorilla in the room,” Thin said.

Thin noted a “significant” recent shift in market expectations for interest rates, from the Fed increasing this month and three times next year, to a likely-but-not-probable December increase and then none or perhaps one in 2019.

Part of the yield curve has inverted, but there remains almost 50 basis points between the three-month and 10-year yields, which has historically been the most accurate predictor of recession, Thin noted.

Regarding trade, “tensions will remain high,” Thin said. “The truce looks good on paper, but it’s questionable.” The economy can potentially live with tariffs of 10%, but an increase to 25% would be painful.  

Europe is another headwind, as Thin noted that the eurozone economy is slowing.

Still, Thin remains bullish on the U.S. economy, and said equities will likely regain traction, and bond yields will rise a the Fed hikes rates two or more times next year. “The 10-year at 2.80-2.85% makes no sense to me given price and wage pressures.”

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