Markets

Risks of an overheating US economy

The US economy and corporate profits have been strong. It’s times like these that investors should start to worry about monetary policy tightening killing the bull market. This infographic will help explain why.

12/10/2018

Multi-Asset Investments

The countdown to a US recession has started

The US economy is strong

But is in danger of overheating

Long-term market indicators signal a recession 12-24 months away

Inflation is nearing a tipping point

Economy working
above capacity

Unemployment at
decade lows

Job openings at
decade highs

Rising wages

US Federal Reserve (Fed) indicators point to rising inflation ahead

Source: NY Fed Reserve, Bloomberg

Monetary policy needs to continue responding

Central banks acting pre-emptively to contain inflationary risk

US Fed containing pressure by:

1

Raising
interest rates

2

Selling assets from
balance sheets

Absorbing fiscal stimulus from Trump’s tax cuts also means the central bank will need to raise rates much more quickly

But tighter monetary policy raises risk of recession

Recessions kill bull markets

Source: Datastream

Even if this market cycle doesn’t end with a bang just yet, risks are rising

US valuations are expensive, suggesting returns over next 10 years will be weak

Valuations are the most important driver of long run market returns

Time to preserve capital, not chase returns

We are positioned defensively, and await better opportunities

The Schroders Australia Multi-Asset team have a long and established track record in objective based investing. Find out more about our capabilities and Schroder ISF Global Target Return here.

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