So far, 2015 is playing out more or less as we expected. Still, that doesn’t mean it’s without surprises. The continued downward movement on U.S. bond yields has been somewhat unexpected, given the Federal Reserve (Fed) is setting the stage for higher interest rates later this year. However, that is partly the consequence of an arguably bigger surprise: the softening of the U.S. economy.
U.S. Deceleration: Blip or Backslide?
A bitterly cold winter in many parts of the country probably had a hand in depressing economic readings of the past few months, but we worry more about the longer-term impact of the ascendant dollar. Its rise to multi-year highs against other major currencies is pressuring profits and earnings expectations for many exporters and multinationals. We think first-quarter gross domestic product (GDP) growth may well disappoint, although we do expect a reacceleration in the second half.
Is the Bull Market About to End? Not Necessarily.
While U.S. stocks are some of the most expensive among developed markets, valuations are still below the market peaks of the past 30 years. By most measures, there are few signs of a recession, and monetary conditions will probably stay accommodative for the foreseeable future. We think the odds favor at least one more anniversary for this six-year bull run, even if returns over the next few years could wind up less than impressive.
Holding Steady Amid Volatility
Surprises or not, we maintain our main investment positioning of overweighting stocks and underweighting bonds. Long-term interest rates have never been this low for this long, and we expect them to rise modestly this year. Our emphasis is still overseas equity opportunities, while we apply more caution toward momentum plays of all shapes and sizes amid more rapid market movements. Volatility remains below the long-term average, but it’s on the rise in both the stock and currency markets, and the spike thus far in 2015 suggests a more volatile year to come.