The year so far has played out largely within our expectations. The divergence in economic growth and central bank policy had some predictable effects, with the most obvious being a stronger U.S. dollar. But there were some surprises. Interest rates unexpectedly plunged early in the year before abruptly rebounding in May. The U.S. economy got off to a rough start, just as Europe notched a surprisingly good first quarter. With six months down, where are the potential opportunities for the rest of 2015?
Fed Liftoff: Not the End of the World
While interest rates are likely to stay low by historical standards, the Federal Reserve (Fed) has made it clear that it is getting close to finally raising short-term interest rates. This is a significant event that could push market volatility beyond the unusually low levels of the past few years, but we think most of the ups and downs will be short-lived for stocks. It is a different story, however, for short-term bonds and high-dividend stocks, which will most likely struggle under higher rates.
U.S. Economy Slow, but Moving Forward
Many investors had high hopes for the U.S. economy going into the year, but the dollar’s drag on corporate earnings and other one-off factors unexpectedly slowed down the pace. From our angle, the U.S. economy is headed in the right direction, and growth should regain some lost momentum in the next six months.
Our Game Plan
We still have high conviction in our preference for stocks over bonds. Although stocks are not as cheap as before, bonds remain expensive. We believe U.S. stocks can climb higher, albeit at a muted pace, but we more often look overseas—Europe, Japan and even the more volatile emerging markets—for better bargains. Also worth considering in a low-growth environment: nontraditional asset classes such as infrastructure or real estate.