Market volatility no match for strong fundamentals.

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In this post from the Mainstay blog, William Priest, CFA, writes that despite the increase in market volatility over the past several days, we believe fundamentals remain strong and maintain our positive economic outlook.

Global Growth

• We are witnessing the most synchronized global recovery since the 1960s.

• The Organisation for Economic Co-operation and Development’s (OECD) leading indicator suggests strong earnings growth during the coming quarters.

• Global manufacturing and service Purchasing Managers Indexes (PMIs) have been rising for over a year.

• In the U.S., earnings growth is being turbo-charged by the recovery and the recent tax changes.

Inflation

• Central bankers have successfully staved off deflation, while inflation remains below 2% in the G-7 and has declined markedly in emerging markets.

• There is some upward pressure in the U.S. due to labor markets, but it is partially offset by technology-driven deflation.

• Our base case is that this tug-of-war keeps inflation controlled.

Monetary Policy

• We expect slow, gradual normalization of monetary policy that should be taken in stride by the markets.

• Quantitative easing (QE) is done in the U.S. and U.K., and tapering has started in Europe.

• There will be a headwind to further valuation expansion, but that does not mean valuations have to significantly compress.

The Markets

• Quantitative tightening introduces more uncertainty, which will increase volatility.

• Volatility creates better opportunities for active managers.

• Stock correlations have fallen, which is also good for active managers.

• The opportunities for stock pickers should hold during 2018.

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