Time for Caution?
Over the past month, strong economic data, continued mergers and acquisitions (M&A) activity and stubbornly low long-term rates have helped global equities push ahead. But stocks have been trading flat lately, and investors may want to exercise a bit of caution this fall.
Volatility Is on the Rise
Not only is September historically the weakest month, but fixed income and currency market volatility has picked up this month amid increasing geopolitical turmoil and investors’ heightened focus on an initial rate hike by the Federal Reserve (Fed).
But Stocks Can Still Advance
While market volatility is likely here to stay and stocks certainly aren’t cheap, a strengthening economy, low inflation and moribund yields suggest that U.S. and global equities can moderately advance by year-end. Plus, stocks still look more attractively priced than bonds and cash.
Equities May Be Less Vulnerable Than Traditional Safe Havens
In addition, traditional “safe haven” assets (such as short- to intermediate duration U.S. Treasuries and gold) may actually be the most vulnerable as a period of rate normalization approaches. Assuming economic data continue to come in strong, the Fed is likely to begin raising rates in the first half of 2015, potentially as early as March.
Relative Value Is Still Key
Given that most asset classes look expensive, we continue to prefer market segments that offer relative value and potential downside protection. 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. Within fixed income, we like munis and mortgages, and we remain cautious of two- to five-year Treasuries.