The BlackRock Investment Institute

Fourth quarter investment outlook

Remarkably steady growth is fostering subdued market volatility. This provides fertile ground for risk-taking in equities and emerging market assets. In brief, three themes look poised to drive markets over the coming quarter.

Sustained expansion

A broadening of steady growth beyond the U.S. gives us confidence that global expansion is sustainable. Roughly three-quarters of economies are on an upswing, including all of those in the Eurozone (a first in the post-crisis period).

From both a fundamental and valuation perspective, I still feel good about equities.

We believe the current cycle is progressing slowly, partly because economic growth has been restrained by a graying population. As a result, we believe the current U.S. economic cycle has ample room to run  likely years. Looking at home and abroad, we see abundant support for our positive view on equities.

The momentum equity style factor has also been on a tear this year, as many U.S. and global companies with strong price momentum have posted double-digit gains. Our expectation for a steady, sustained expansion suggests momentum will continue to have more upside potential.


Rethinking risk and returns

Market volatility has remained historically low, prompting fears that it may pick up in the near term. However, low-volatility regimes tend to be the norm, especially when economic growth is stable. Without systemic financial threats, we think the low-volatility environment may persist.

We still think clients are rewarded for taking risk at this stage of the cycle.

Some investors also worry about high equity valuations when compared to historical averages. Our belief is that structurally low interest rates have supported and will sustain higher prices on stocks. Viewed through this lens, we think it is important to look through temporary sell-offs caused by geopolitical jitters or other mini-shocks. Equity dips can be buying opportunities.

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