PIMCO’s outlook for 2019 calls for a “growing but slowing” global economy, with last year’s economic divergence – in which U.S. growth accelerated as the rest of the world slowed – giving way to a more synchronised deceleration in global growth.

Our updated quantitative models indicate that the probability of a U.S. recession over the next 12 months has risen to about 30% and is thus higher than at any point in this current economic cycle – the second longest on record (see chart below). Even so, our baseline does not include an imminent recession; the models are flashing orange rather than red. Importantly, however, the current market environment makes amply clear that it doesn’t take a recession for turmoil to roil financial markets.

The current U.S. economic cycle is close to the longest on record

Source: PIMCO, National Bureau of Economic Research (NBER), as of 30 September 2018

On top of this, major developed market central banks are gradually removing monetary support, valuations in equities and credit are at or near all-time highs, and political risk looms large across countries.

Against this uncertain backdrop, we see the potential for heightened volatility. We therefore believe that maintaining flexible portfolio construction, with the ability to avoid certain exposures and focus on asset classes and/or sectors that offer value, will be increasingly important as market and liquidity conditions evolve.

Visit our “flexible investing” page to view our range of flexible strategies.


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