The Shadow Knows
Examine the unseen and unanticipated potential consequences lurking in the shadows of current trends.
The 1930s radio drama The Shadow began each week with the same ominous laughter and sinister words: “Who knows what evil lurks in the hearts of men? The Shadow knows!”
While we may not be talking about lurking evil when it comes to the economy and the financial markets, we can say that numerous potential consequences—both positive and negative—are hiding in the shadows of current trends. In this report, we attempt to bring these potential consequences forth across asset classes, indicators and macro strategy signals. They may never see the light of day, but we should prepare for those that have a higher probability of occurring.
For now, we still believe we are in a midcycle expansion and expect economic growth to increase this year and next. While we believe the big move in equity returns is over, we still expect 7% to 8% returns, including dividends, from the Standard & Poor’s (S&P) 500 for this year and next. This is a grind‐it-out type of market, but we believe it contains themes that can produce attractive returns. With more volatility expected, given current trends and possible consequences in the “shadows,” we prefer an overall strategy of “getting paid to wait” and an increase in diversification, nonfinancial assets, and alternative investments. We would add to the hedge fund space and use a multi-asset approach to limiting volatility.
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