Global stocks have enjoyed a good run, roughly tripling since the financial crisis. Options prices, which indicate the market’s assessment of short-term risk, signal limited upside, but do not forecast a looming downturn. On the contrary, the equity market appears fairly priced given a number of positive factors that could propel the current business cycle, including potential U.S. tax reform, continued quantitative easing in Europe and Japan, and an upward trajectory in global growth. Inflation also remains subdued, thanks to new technologies that improve efficiencies and keep prices in check.

In other words, barring unforeseen economic or political shocks, the global economic barometer is set to fair. We argue that some of this benign outlook is due to the options market’s expectation of an orderly unwinding of the ultra-accommodative monetary policies in the U.S. and Europe in the next few years.

The Federal Reserve is expected to continue raising interest rates gradually in 2018 and beyond, while slowly reducing its $4.5 trillion balance sheet. The European Central Bank, which has yet to begin tightening, is focusing on tapering asset purchases first and will likely raise rates at a later date. This staggered approach could help global markets avoid a sudden liquidity crunch that would curtail growth, create a headwind for equities and cause global bond yields to spike – more reason to believe the current expansion can persist.

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