INVESTMENT DIRECTIONS

Enigmas

ago 17, 2017
por BlackRock

Riddles and mysteries

Winston Churchill famously described Russia as “a riddle, wrapped in a mystery, inside an enigma.” Without getting into current relations with Russia, it does strike us that markets these days are similarly shaped by a number of conundrums.

Is historically low volatility a danger?

The current period of historically low volatility has resulted in some anxiety—many assume it’s only a matter of time before volatility spikes and a painful reversal occurs. However, a fascinating new paper by BlackRock’s Jean Boivin and Ed Fishwick notes that low-volatility regimes can last for years and a switch occurs when signs indicate a recession is nearing. But the global economy remains in a regime of steady, synchronized and above-trend growth.

Time to de-risk?

While concerns about valuations and sustained low volatility have led some to wonder if markets are too risky, we see a risk that many investors are not putting their cash to work. Indeed, BlackRock’s Investor Pulse survey found Americans hold 58% of their investable assets in cash where they earn little or no interest.

Do valuations matter?

Meanwhile, U.S. stocks are expensive by many measures. However, the economic backdrop is positive and earnings are strong—as of this writing, 77% of the S&P 500 have beat earnings forecasts. Still, we are neutral U.S. stocks, while overweight equities outside the United States, specifically Europe, Japan and emerging markets.

What rising rates?

Will interest rates ever rise? Since the Federal Reserve (Fed) began its current tightening, the path to higher rates has not been steady and smooth. Going forward, we expect the Fed will continue to be patient in raising rates with the next increase in December. Still, the market is not sufficiently pricing in what the Fed is likely to do, or the potential risks of the Fed slowing its asset purchases. All of this underscores our preference for equities over fixed income.

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