The BlackRock Investment Institute

Fourth quarter investment outlook

oct 3, 2017

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).

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.

Take action: Stay committed to equities, and think globally

A sharp earnings recovery is supporting stocks globally, favoring non-U.S. markets. All major regions are posting earning-per-share growth of over 10% for the first time since 2005, with the exception of the post-crisis bounce. Europe is sustaining above-trend economic expansion. Japan has seen a jump in earnings expectations. And in emerging markets, improving cash flows and reasonable valuations look appealing.

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.

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.

Take action: Keep calm, but hedge on

Against this positive backdrop of economic growth, staying invested through inevitable drawdowns will be key. This is precisely when fixed income as a risk management tool is critical. A tilt toward actively-managed fixed income strategies may help investors navigate an unpredictable rate environment, while providing a ballast to risk assets.