INVESTMENT DIRECTIONS

Market forecast calls for investor caution

Jun 20, 2016 / By BlackRock

With a financial low pressure system lurking, our experts weigh in on how to weather the coming market storms.

 


 

Summer is upon us, offering the promise of lazy, hazy days filled with rest and relaxation—but also sudden thunderstorms, hurricanes, typhoons and excessive heat waves. In weather, low pressure systems typically indicate a chance of precipitation, and we appear to be nearing a financial low pressure system. The likelihood of an immediate Federal Reserve (Fed) hike has gone down, potentially providing a tailwind for risky assets in the short term. But given the already expensive state of those assets, the chance of more volatility over the coming weeks is reason enough for caution.

Thunderstorms brewing

We have downgraded global equities to neutral. While a more dovish Fed may lead to some short-term boost to risky assets, stocks still face several obstacles. Those include elevated valuations (particularly in the United States), a potential British exit (Brexit) and, yes, the fact that the Fed is still on course for raising interest rates. We still prefer stocks to government bonds, but would increase cash positions temporarily

A break in the clouds

Some good news: There are nascent signs that inflation is inching up. Much of the world remains stuck with low growth and low (in some countries, negative) inflation and will be for some time, we believe. However, there are signs of higher levels of inflation ahead—and that may be a positive in a world where deflation has been the greater threat.

Summertime and the investing is not easy

What does a low-growth world, pricey stock valuations and a more cautious Fed add up to? Expect low returns, spikes in volatility and a need to cast an ever-wider net for yield. As a result, we’re more cautious on equities. Investors seeking higher returns will need to take on more risk, be it market, liquidity or active risk. All are viable, we believe, but the choices very much depend on specific portfolio goals and time horizons.

 

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