Volatility Is Back
After months of relatively calm markets, volatility has returned. In recent weeks, market volatility has pushed up against four-month highs as investors have contended with a growing list of geopolitical risks, including escalating tensions in Gaza, Iraq and Ukraine.
But Stocks Can Push Ahead
While we expect the rocky road to continue for the foreseeable future and stocks are close to fully valued, we still see U.S. and global equities finishing the year modestly higher, barring an unexpected exogenous shock. Low inflation, continued easy monetary policy from the Federal Reserve (Fed) and an improving U.S. economy should help support further stock gains. Plus, stocks remain more attractively priced than the alternatives, namely bonds and cash.
We Like Market Segments Offering Relative Value
Though we still like stocks over bonds, we prefer market segments that offer relative value and potential downside protection. In fact, relative value—not just risk aversion—seems to be a major driver of market performance lately. We see this focus on value continuing.
Reasonable Is the New Cheap
At a time when most major asset classes look expensive, investors should focus on those that are more reasonably priced. In particular, we see value in select international markets, particularly Japan and emerging Asia; international and global dividend funds; large- and mega-cap companies; and certain cyclical sectors. In addition, within fixed income, we favor longer-dated munis and mortgages over expensive, rate-sensitive fixed income sectors, and we would be particularly cautious on two- to five-year Treasuries.