Investment Directions Market Outlook
- The Great Divergence Begins
The Federal Reserve (Fed) ended its quantitative easing (QE) program this past month, and we think it will begin raising interest rates next year, probably over the summer. Healthy economic growth in the United States means less need for monetary stimulus here, but weaker growth outside the United States—evidenced in part by the recent collapse in oil prices—increases the likelihood of greater stimulus by central banks elsewhere, something we are seeing with Japan and Europe. Judging by the market reaction to the Bank of Japan's (BoJ's) expanded asset purchases, this central bank divergence will have a significant impact on financial markets going forward.
- A New Political Landscape, but Does It Matter?
While the U.S. midterm elections produced a clear victory for the Republican Party, it is doubtful that this shift in Washington's balance of power will have a long-lasting effect on markets. Gridlock is likely to continue, but there may be movement on issues like trade, health care, energy and defense.
- A Rare Bargain: Japan
Stocks continue to climb, leaving a world of few bargains. One exception: Japan, which is by far the most attractively priced developed market, despite rallying recently. We see solid investment catalysts on the horizon that can support stocks. The rally could go much further.
- Emphasis Still on Equities
Even as volatility returns, we continue to prefer stocks over bonds and cash, focusing on segments that offer relative value, such as certain international markets and cyclical sectors. Due to improved sentiment and more neutral valuations, we are moving back to a market weight in small caps. In fixed income, we are becoming more constructive on credit, especially U.S. high yield and asset-backed securities.