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The 5-Minute Forecast

1Q18: Pivot to International

A concise summary of the Hartford Funds Multi-Asset Team’s views on the main challenges facing investors: Growth, Income, Volatility, Inflation, and Taxes.

For a quick market recap of 2017, please click here.

Growth

We remain optimistic on equities as global economic growth continues to improve at a steady pace. On balance, we prefer developed markets outside the US due to more attractive relative valuations and accommodative monetary policies. Likewise, corporate fundamentals outside the US may have more room for improvement in terms of earnings growth and margin expansion.

Emerging-market equities remain attractive in our view, supported by a weaker US dollar, stable commodity prices, and generally improving economies.

The significant corporate tax cuts and repatriation holidays included in the Trump administration’s tax plan likely bode well for extending equity gains domestically. Whether companies decide to reward shareholders through dividends or buybacks, increase wages, or invest further in R&D or acquisitions remains to be seen.

Several years of US equity outperformance have increased the probability of client portfolios having a significant overweight to US equities. In light of this, investors should consider pivoting to international by increasing their allocations to developed and emerging-market equities.

Implementation Ideas »


Income

Investors looking to fixed income as a potential source of capital appreciation may be disappointed. Historically tight credit spreads, rising rates, and the prospect of inflation may create significant headwinds, especially for traditional fixed-income sources such as investment-grade and high-yield corporate bonds.

We believe that active management is of paramount importance, particularly in fixed income due to the tight spread environment and the potential effects of the new tax reform legislation on corporations. We prefer strategies that are flexible, less reliant on duration,A and ones that can potentially benefit from rising rates, such as bank loans.

Similarly, investing a portion of fixed-income portfolios abroad may be prudent since exposure to international debt provides diversification away from US interest-rate risk. Our outlook for emerging-market debt remains positive. Emerging-markets local debt, in particular, may help counter the effects of heightened currency volatility that could occur as central banks continue to adjust rates.

Implementation Ideas »


Volatility

The markets have remained remarkably calm as the S&P 500 Index posted 14 straight months of gains, and it’s been more than one year since the Index experienced a decline of 5% or more. Volatility doesn’t need to revert to the mean to have an impact: Investor complacency could turn any surprises into a greater source of potential market shocks.

We believe several catalysts for increased volatility are looming, and investors would be wise to avoid confusing low levels of price volatility with low levels of future risk. Geopolitical concerns, a late-cycle economic recovery, the unwinding of easy monetary policy, and rising US interest rates highlight why investors should prepare for volatility’s eventual return.

In light of this, investors should consider increasing geographic diversification of their equity holdings or shift to lower volatility and/or actively managed equity options.

Within fixed income, we believe investors should reduce domestic duration risk and offset equity risk with non-US sovereign debt and higher-quality credit.

Implementation Ideas »


Inflation

Inflation continues to be muted, but an upward shift could result in more aggressive rate increases by the US Federal Reserve. Domestic inflation could surprise to the upside in 2018, spurred on by a stronger and tighter labor market, a weaker US dollar, and higher commodity prices. Before stabilizing this year, real assets such as commodities and natural-resource equities had been out of favor during the last several years. If inflation becomes a concern, investors may recall that these assets have historically provided some relief from the impact of sustained levels of higher inflation.

Implementation Ideas »


Taxes

Uncertainty around the GOP’s proposed tax treatment of existing municipal bond provisions led to a notable increase in municipal bond issuance in December. This resulted in more attractive entry points, but drove down prices in the short term. Now that the bill has passed, the elimination of tax-exempt status for advance refunding bondsB will likely reduce supply in the longer term. Research suggests that this subset of bonds will likely reduce supply in the longer term by roughly 25%.C

Implementation Ideas »


Market Review

2017 was one of the strongest years for investors in recent memory. Nearly all asset classes generated positive returns, with the exception of a few real-asset categories.

Global equity markets continued to make meaningful advances in Q4. USD and developed ex-US equitiesE both returned more than 20% in 2017, while emerging-market equitiesF returned more than 37%. Technology and financial companies generated positive returns despite high valuations giving some investors pause.

Fixed income surprised to the upside throughout most of 2017. Negative yields in major developed markets overseas spurred demand for US bonds, and the demand for income outweighed concerns about rising US rates. While all major fixed-income subsectors generated positive returns for the year, the dispersion of returns increased as the year drew to a close.


Past performance is not a guarantee of future results. Investors cannot directly invest in an index.

A Duration risk is the risk associated with the sensitivity of a bond’s price to a one percent change in interest rates.
B Advanced refunding bonds are bonds that are issued to pay off another outstanding bond. The new bond is often issued at a lower rate than the older outstanding bond.
C Source: The Bond Buyer, “Tax bill will lead to radical transformation of muni market,” 12/18/17
D US equities are represented by the S&P 500 Index, which is a market capitalization-weighted price index composed of 500 widely held common stocks.
E Developed markets ex-US equities are represented by the MSCI EAFE Index (Morgan Stanley Capital International Europe, Australia and Far East Index), which is a free float-adjusted capitalization index that is designed to measure developed market equity performance, and excludes the U.S. and Canada.
F Emerging market equities are represented by the MSCI Emerging Markets Index, which is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

All investments are subject to risk, including the possible loss of principal. Foreign investments can be riskier and more volatile than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as political and economic developments in foreign countries and regions (e.g., “Brexit”). These risks are generally greater for investments in emerging markets. Fixed income risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall; these risks are currently heightened because interest rates are at, or near, historical lows. Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Bank loans can be difficult to value and highly illiquid; they are subject to credit risk, bankruptcy risk, and insolvency. Municipal securities may be adversely impacted by state/local, political, economic, or market conditions. Risks of focusing investments in the natural-resource sector may increase liquidity risk, volatility and risk of loss if there are adverse economic consequences in these sectors. The value of inflation-protected securities generally fluctuates with changes in real interest rates, and the market for these securities may be less developed or liquid, and more volatile, than other securities markets. Commodities may be more volatile than investments in traditional securities. Risks of focusing investments in the natural-resource sector may increase liquidity risk, volatility and risk of loss if there are adverse economic consequences in these sectors. Diversification does not ensure a profit or protect against a loss in a declining market. Small- and mid-cap securities can have greater risk and volatility than large-cap securities. The main risk of real estate related securities is that the value of the underlying real estate may decrease in value. For dividend-paying stocks, dividends are not guaranteed and may decrease without notice.

The Floating Rate Fund and Floating Rate High Income Fund should not be considered an alternative to CDs or money market funds. These Funds are for investors who are looking to complement their traditional fixed-income investments.

The views expressed may not reflect the opinions of the sub-advisers to our funds. They should not be construed as research or investment advice nor should they be considered an offer or solicitation to buy or sell any security. This information is current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.

Index data for Citigroup World Government Bond Index© 2018 Citigroup Index LLC (“Citi Index”). All rights reserved. CITI is a trademark and service mark of Citigroup Inc. or its affiliates, is used and registered throughout the world, and is used with permission for certain purposes by Hartford Funds Management Group, Inc. Hartford World Bond Fund is not sponsored, endorsed, sold or promoted by Citi Index, and Citi Index makes no representation regarding the advisability of investing in such fund. Reproduction of the Citi Index data and information (collectively, “Citi Data”) in any form is prohibited except with the prior written permission of Citi Index. CITI INDEX GIVES NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF ACCURACY, ADEQUACY, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OR USE. Citi Index is not responsible for any errors or omissions in, or for the results obtained from use of, Citi Data, and in no event shall Citi Index be liable for any direct, indirect, special or consequential damages in connection therewith.

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