Market Insights

[Narrator] Welcome to the SunTrust Investment Advisory Group’s mid-year outlook and update. We’re more than halfway through the year, and it’s a good time to revisit our 2018 market themes and look ahead to what we expect for the rest of the year. We encourage you to discuss the information with your advisor to assess what these trends could mean for your financial plan. Today, we’re joined by Keith Lerner, chief market strategist and managing director of portfolio and market strategy. Let’s start off with a quick look back at what we have seen so far:

[Keith Lerner] Stocks are relatively flat this year, but that’s after a big 2017 and 9 straight years of gains. US stocks and small caps, in particular, are standing out to the upside while emerging markets have been a standout to the downside. Bonds, which we are underweight, are underperforming stocks, and alternative strategies fall between stocks and bonds and are performing in line with our expectations.

Our 2018 outlook themes are largely playing out, but we have updated our economic outlook to reflect a greater divergence in global trends than what we expected coming into the year. Global recession risks remain low, but the synchronized recovery is now shifting to one of divergence in growth, fiscal policy, and monetary policy.  

Specifically, the growth composition is shifting more in favor of the US, which is responding to significant stimulus. Conversely, the European and Japanese economies have tapered off after a lift from depressed levels in 2017. China continues to manage its growth rate in the 6% to 7% range.

[Narrator] Next, our bullish but bumpier theme for stocks remains intact:  

[Keith Lerner] Consistent with our expectations, the market path this year has been more volatile. The battle between an improving US economy and solid global corporate profits are being offset by the Federal Reserve raising rates, trade and tariff worries, and mixed global growth trends. Moreover, stocks have tended to trade in a choppy fashion during mid-term election years, where rhetoric and noise tends to pick up, with most of the market’s gains typically occurring in the fourth quarter.

Investors, however, should continue to give the bull market the benefit of the doubt given low recession risks, global valuations that are at the lowest level in more than two years, and global central banks remaining broadly accommodative.

[Narrator] So what are the implications for portfolios as we get into the second half of the year? Keith explains.

[Keith Lerner] We maintain a slight tilt to US equity and see an opportunity in mid-caps. We remain underweight non-US developed markets and are currently neutral emerging markets.

[Narrator] That brings us to our third theme—a Step Up in fixed income—which is on track. Interest rates have risen consistent with our expectations.

[Keith Lerner] While another overshoot is probable this year, our base case remains for the yield on the 10-year Treasury to end 2018 around 3%.

The Fed is set to continue raising rates this year. We expect the yield curve to remain relatively flat.

We maintain our focus on high quality within bonds, which should act as ballast during periods of market volatility, as was the case during the late January stock market correction.

So to recap: We still view global recession risks as low, but trends have become more divergent; we see upside in stocks with a bumpy path forward, and we are sticking with high-quality bonds and alternative strategies to help reduce the magnitude of swings in portfolio values.

[Narrator] We thank you for listening and for entrusting SunTrust with your wealth, and we look forward to keeping you informed on our investment views as the year unfolds. Please reach out to your SunTrust advisor to learn more about how our investment themes may impact your portfolio.