Schroders chief economist Keith Wade has warned that the equity bull market faces macro challenges which may warrant a more cautious approach to risk assets.
Wade said that market volatility could be increased should the Federal Reserve tighten policy more rapidly than expected. He commented: “We continue to believe that the unemployment rate will fall faster than the Fed anticipates. An acceleration in wage growth should follow and, whilst this would be good for the consumer side of the recovery, it will also bring greater inflationary pressure. We would expect the Fed to respond to this by ending QE in October, and then raising interest rates from June next year, with the Fed funds targetting 1.5% at end 2015.” Wade added that US policy is very loose for this stage of the economic cycle.
Another macro challenge to equities is a weakening of profits growth due to higher wages as the economy continues to recover. This could lead to a squeeze on corporate profits, and a fall in profits as a share of GDP.