Recent market volatility has made some investors wonder if the economic cycle is ending and stocks are at the start of a prolonged decline. One indicator we are watching for signs of the potential for a recession and a deeper and prolonged decline in stocks is the gap between the unemployment rate and the inflation rate. This indicator suggests that the risks are rising.
We believe there are three positives, three negatives and three wildcards for stock market performance in the fourth quarter. We expect the balance of these factors to result in further gains for global stocks.
EM stocks are prone to high volatility, as we have experienced this year. We will be watching the signs closely to see if this is typical volatility or something leading to a deeper and more prolonged downturn.
There are some reasons to think that the probability of a repeat of a past crisis has eased. The changes we have seen should help reduce the vulnerability of the global system to shocks like those of the past. Of course, risk has not been entirely eliminated from the system.
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