INVESTMENT DIRECTIONS

Into thin air?

May 16, 2016 / By BlackRock

As markets appeared to stumble on their grind upward, investors are wondering if we can still climb higher – or if it’s time to seek shelter from storms on the horizon. Our experts share their thoughts.

 


 

Mountain climbers converge on Mount Everest each May, when weather conditions offer a window of opportunity to attempt a summit. But sudden storms still can—and do—appear, defeating even the most experienced and fit climbers. At times,they must make quick judgments at high altitudes about whether to proceed. Similarly, as markets appeared to have stumbled on their grind upward, investors are wondering if we can still climb higher, or if it is time to seek shelter from storms on the horizon.

Base camp

Our key views: Stabilizing growth, a slower pace of rate increases by the Federal Reserve (Fed) and a pause in the U.S. dollar’s rise bode well for markets in the near term. But future returns are likely to be more muted and we expect more volatility ahead. Meanwhile, monetary policy divergence—a key driver of the dollar’s gains—looks to be slowing, with the eurozone and Japan reaching the limits of negative interest rates, and the Fed signaling a slower pace of rate increases.

On belay

The rebound of stocks since February may feel a bit long in the tooth, but it is important to remember: U.S. economic growth remains strong enough to ease fears of a recession, but not so robust that the Fed will increase rates too fast or too soon. Still, disappointing earnings weigh on the market and point to lower stock returns—and a bumpier ride—ahead. Overall, however, conditions are right to continue to favor U.S. stocks. For investors with more appetite for risks, emerging markets appear enticing, but selectivity is key.

The Khumbu icefall

We expect more volatility as the Fed normalizes policy and the business and credit cycles continue to mature. There is the strong possibility of sharp momentum reversals as many investors have piled into similar, correlated trades. Political and policy uncertainty in the U.K., China, and the U.S. elections certainly don’t help matters.

 

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