Krishna Memani, Chief Investment Officer and Portfolio ManagerYou are forgiven if you thought I was reminded of the famous Alicia Keys song, “Girl on Fire,” following the U.S. Bureau of Labor Statistics’ latest Consumer Price Index (CPI) inflation report. As everyone knows by now, the CPI came in a tad higher than expected.No, that is not the reason I am thinking things could get heated. I am not that bothered by the inflation report, as the source of that uptick – apparel – is not sustainable, just as the source of the downtick last year – cellular services – was not sustainable. For example, the fact that department store chain Kohl’s Corp., for the first time in recent memory, ordered the right amount of merchandise for the Christmas season and didn’t have to discount leftover inventory in the New Year is not cause for significant alarm in my book.Instead, what I am getting worried about is the size of the fiscal stimulus that is being dumped on the U.S. economy at this point in the cycle. When we wrote our 2018 outlook last year, we clearly were expecting a fiscal expansion on the back of the proposed tax cuts. That was the reason why we speculated that, while we may not be there yet, the end of the cycle is getting closer.What I did not expect was the fiscal expansion due to increased federal government spending of almost $300 billion over the next two years. Now we are talking real money, almost 2% of GDP in 2019. As a result, U.S. economic growth in 2019 could be as high as 3%.
Equities, especially DM equities, recover and do well for a bit and then roll over, It becomes a value over growth market, Credit continues to be in the cross hairs of the markets, and Rates keep their upward trend for a while until the cycle ends and then rally.It may still turn out to be a relatively long cycle, but the end would be imminent.In the second scenario, in which U.S. growth is decent but not spectacular and the dollar is relatively stable, the Fed moves gradually and eases off in 2019, and we bring back the noughties and all sorts of conundrums: The cycle gets extended, Developed market equities do well, but EM growth accelerates and EM equities deliver solid performance, Credit remains stable, and Interest rates don’t go up meaningfully.Essentially, this would be a more acute version of the 2018 outlook we expected – the current volatility dies down, and we get back to the longest cycle and potentially the best returns we have ever experienced in the short to medium term.For now, I am leaning towards the second scenario but watching the dollar to see if I need to adjust my views.For more news and commentary on current market developments, view the full archive of Krishna Memani's CIO Insights and follow @KrishnaMemani.Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments. Carefully consider fund investment objectives, risks, charges, and expenses. Visit oppenheimerfunds.com or call your advisor for a prospectus with this and other fund information. Read it carefully before investing.OppenheimerFunds is not affiliated with IRIS.xyz.©2018 OppenheimerFunds Distributor, Inc.