INVESTMENT DIRECTIONS

The good, the bad and the ugly

Sep 19, 2017
By BlackRock

The good

We enter the last few months of 2017 in a relatively decent position. As BlackRock’s Chief Equity Strategist Kate Moore noted recently, the global economy is in a “Goldilocks” moment, with strong enough growth to bolster markets, but not too hot to trigger greater monetary tightening by central banks. Equities have performed well this year, including outside the United States, and surprisingly, so have many bonds, which have avoided another “taper tantrum.”

The bad

However, many investors seem nervous. Some question valuations in the United States after an eight-year rally. (We believe valuations are not as stretched as they appear, and stocks still look attractive relative to bonds.) Others may believe that spikes in volatility like we saw earlier in August will be more commonplace, given the unusually long period of low volatility we’ve enjoyed. (We believe a more sustained correction will occur when we detect signs of a recession coming, which we are yet to see.)

The ugly

Still, there is no shortage of potential black swan events that could rattle markets. Escalating tensions with North Korea are obviously a major concern. In Washington, meanwhile, it appears that an increase to the debt ceiling and funding for the government will go through, but on a short-term basis, setting the stage for another showdown in a few months. With the additional fight over immigration legislation to address the Deferred Action for Childhood Arrivals (DACA) program, this may potentially create headwinds for tax reform, passage of which the markets have been eager for.

For a few dollars more

Nonetheless, none of this backdrop leads us to change our positioning. We prefer stocks over bonds, but are neutral U.S. stocks, while overweight equities outside the United States, specifically Europe, Japan and emerging markets. However, we still favor a strategic position in bonds, which can help provide ballast and act as a vital diversifier in times of turmoil.

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