INVESTMENT DIRECTIONS

Spring training

Mar 10, 2017 / By BlackRock

Play ball!

Spring training is underway, bringing baseball players back for another season. It is a time of unbridled confidence, when every team imagines it will win the World Series, and every player will have a record-breaking year. Of course, few of these predictions come true. Investors appear to have a similar optimism these days, but just as even the greatest players can stumble, political realities and stretched valuations could well disrupt the market rally.

Knuckleball

For years, investors often took their cues by analyzing the nuances of Federal Reserve statements. Now, the focus has increasingly moved to parsing the ups and downs of the Trump administration. For example, equities rallied strongly after President Trump’s acclaimed address before both houses of Congress in late February, but stumbled after questions surrounding Attorney General Jeff Sessions broke the next day.

Hit and run

Certainly, the potential Trump administration policies represent an important shift in market sentiment and expectations. But it is important to note that signs of rising economic growth coupled with accelerating inflation—so-called reflation—actually predate President Trump’s election. Economic data already show an improving economic picture, before the new administration’s policies have even been enacted. Moreover, it is a global phenomenon. In short, we still see reflation as the driving force for the market whether it gets a “steroid boost” from new policies or not.

Small ball strategies

U.S. stocks are not cheap, but there are pockets worth considering, such as financials and value. We still prefer stocks over bonds, and within stocks looking overseas in Europe, Japan and emerging markets, particularly in Asia. Still, investors may need to play a game of “small ball”—by focusing on grinding out runs through singles and moving the runner forward, rather than hoping for the home run.

DOWNLOAD REPORT