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Investor caution in order as U.S. economy, markets climb higher

Timely insights on the issues that matter most to investors.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Atlanta Capital Portfolio Management Team

      Atlanta -- On July 1, the current U.S. economic expansion that began June 2009 reached 121 months, making it the longest on record since the mid-1850s. Moreover, the four expansions we have experienced since the early 1980s are among the six longest to have occurred over the past 150 years.

      AC BLOG IMAGE 07/17

      Explanations as to why recent good times are lasting so long - or conversely, why periods of financial stress are so short - usually include some combination of persistently low inflation/interest rates, a more diverse and service-based work force, and a nod to globalization and technology. Whatever the reason, this extended period of market and economic prosperity is making the struggles of last decade's global financial crisis harder to recall. Particularly as the S&P 500, Dow Jones Industrial Average and Nasdaq all flirt with record highs.

      Signals to watch

      We do not, however, believe that these prolonged times of relative success imply the repeal of traditional business-cycle conventions. In fact, we see several indicators that appear to be flashing a cautionary yellow. Even after a decade of relative tailwinds for the U.S. economy, the existence of roughly $13 trillion in debt securities with negative yields suggests more challenging times may lie ahead. The recent domestic yield-curve inversion, with the 10-year Treasury note trading at a lower yield than the three-month bill, has pundits on watch for further evidence of a coming recession.

      The latest trade truce between U.S. President Donald Trump and Chinese President Xi Jinping appears to have buoyed the markets for the moment, but market sentiment seemingly ebbs and flows with the latest development on global trade negotiations. Finally, the recent debates among Democratic presidential candidates mark the official start of the next U.S. election cycle, and with it, a ratcheting up in contentious policy deliberations. Now hardly seems the time for complacency.

      Discipline throughout cycles

      Regardless of where we are in the economic cycle, our view is that companies with a demonstrated history of consistent growth and stable earnings have the best prospects of long-term success. We believe these types of enterprises are able to self-fund growth independent of the vitality of the capital markets, providing ample flexibility to invest regardless of the macro backdrop. In addition, responsible companies actively managing their operational, social and environmental risks may offer investors a more attractive risk-reward profile over time.

      Bottom line: We believe investors need to exercise a watchful eye over burgeoning U.S. debt, global trade agreements, and political policy debates even as the economic expansion continues. Strategies that favor responsible companies showing a history of consistent growth and earnings may offer a risk-reward profile that will serve investors well across economic cycles.