Did stocks just melt-up, setting up a possible melt-down? Friday’s sharp decline, the biggest since the Brexit vote in June 2016, might have led us to forget that just a few days ago many claimed the stock market was melting up. The strong finish to 2017 followed by big gains in January certainly made this a reasonable characterization. (Though we continue to believe stock valuations are well supported by fundamentals here.)
The U.S. dollar was in the news recently after comments from Treasury Secretary Mnuchin, European Central Bank (ECB) President Draghi, and President Trump created volatility in the world’s reserve currency. Mnuchin indicated that a weak dollar could benefit the United States as it relates to trade and opportunities. Drahgi said that a strong euro (and by extension a weaker dollar) is understandable given strong European growth, but he also raised concerns that if other countries start targeting specific currency levels, it could have an impact on the ECB’s ability to meet its inflation goals. Trump then followed up saying that he ultimately wants a strong dollar. This mixed messaging has led some to ask why there seems to be disagreement on the path the dollar should take, and what it means for markets.
Global economic growth exceeded expectations in 2017, and we expect another strong year in 2018. The Citi Global Economic Surprise Index, which was well above zero for most of the second half of 2017, signaled that global economic data was exceeding expectations [Figure 1]. Drivers of strong global performance in 2017 included steady growth in the United States, better-thanexpected economic data in Europe, continued positive performance from Japan, and stabilization in China following several years of deceleration.
