In the 39th episode of the OppenheimerFunds World Financial Podcast, Chief Investment Officer Krishna Memani offers his thoughts on the outlook for the second half of 2018 and beyond. He notes that the U.S. economy is accelerating today, helped by the passage of the Tax Cut and Jobs Act and the 2018 federal budget. This fiscal stimulus didn’t change the trend growth rate of the economy, but it gave it a short-term boost that should carry into 2019.

What happens next is largely in the hands of the U.S. Federal Reserve (Fed) and its approach to monetary policy in late 2018 and 2019. If the Fed misjudges this stimulus-induced growth spurt as higher-trend growth, and continues raising interest rates in 2019, we could see the yield curve invert and the business cycle come to an end. A more likely scenario is that the Fed recognizes that the U.S. is experiencing a cyclical peak and will limit tightening to 2018. This would help extend the cycle through 2019 and potentially into 2020. 

The following are a few of the issues on the radar today:

  1. Potential Trade Wars: We’re focused on tariffs, but we’re not particularly concerned about them just yet, for a few reasons. At the moment, they represent a small portion of total trade. As a result, the tariffs are likely to impact sentiment more than they will net trade.  Additionally, tariffs are unlikely to reduce the U.S. trade deficit, particularly not while we have large (and growing) fiscal deficits.
  2. Market Volatility: Volatility has reared its head after an extremely subdued 2017. There are several drivers. First, we’re feeling the impact of more aggressive monetary policy as the Fed responds to the acceleration in U.S. growth.  Additionally, after a strong 2017 in equity markets, we’re experiencing a degree of mean reversion. While 2018 hasn’t been a bad year for equities, we can’t expect a repeat of 2017’s performance.
  3. Emerging Market (EM) Growth: The biggest surprise of 2018 so far has been a softening in EM growth. While we expected global growth to be less synchronous than it was in 2017, we didn’t expect EM growth to flatten out. U.S. dollar strength has stressed EM assets, particularly bonds, but we don’t think that dollar strength is sustainable. Additionally, we expect U.S. growth to start leaking overseas, helping to reignite EM economies.

For more on the outlook for monetary policy, tariffs, and what to expect from developed and emerging markets, listen to Episode 39 of our World Financial Podcast, "2018 Mid-Year Outlook with CIO Krishna Memani."