Winter freeze gives way to market heat

Winter freeze gives way to market heatAs we enter the second quarter of 2014, the economic landscape is heating up amid an environment of continuing volatility and uncertainty. Our Strategists’ 2014 Global Outlook – Second Quarter Updatepoints to some of the key warming trends:

  • The February freeze in U.S. equity markets is thawing, giving way to a rise in stock valuations.
  • The U.S. Fed’s updates are starting to sound slightly more hawkish.
  • Concerns about China’s debt are escalating.
  • Japan’s consumption tax hike is now taking effect.

Add to this the geo-political drama in Crimea and the simmering China-Japan stand-off in the East China Sea, and we have no shortage of potential uncertainties to affect market sentiment.

With this backdrop, global markets are struggling to find a clear direction. Our indicators point to a probable moderate, low-inflation expansion that may generate job gains of around 215,000 per month during the remainder of 2014.

These indicators also suggest that the Fed will begin raising interest rates in the middle of 2015. You can see more of our updated figures in our 2014 Outlook Infographic. At this stage, our outlook includes a general preference for equities over fixed income, an appreciation for credit and a bias against exposure to long-term interest rates.

With a global perspective in mind, our analysts have provided thumbnail assessments of three major regions within the new Outlook report:

  • North America - Our strategist, Doug Gordon, discusses the tension between stretched equity valuations and a cyclical growth upswing. He concludes that the growth outlook may push markets modesty higher, with a potential bias to large-caps and value.
  • Asia-Pacific –Strategist Graham Harman devotes special attention to Japan, where the initial euphoria over “Abenomics” seems to have passed and investors are questioning whether it was another false dawn. Graham’s analysis points to transformative change in Japan, and he believes Japan will likely return to favor with investors once the impact of the consumption tax rise becomes clear. In China, Graham sees uncertainty over the rate of continued GDP growth. This, combined with the after-effects of currency collapses in the so-called “fragile-five”1 emerging markets (EM) economies, makes us cautious on EM exposure.
  • Europe – In a word, the situation in Europe is complex. Economic growth seems to be emerging at last, but disinflationary forces appear to be taking hold. The risk of a growth disappointment is possible and rising. Wouter Sturkenboom, our strategist covering Europe, Middle East, Africa, is concerned that the European Central Bank may be slow to provide additional stimulus. European stocks could be poised for potential outperformance if the stimulus materializes, but until then, our strategist prefers benchmark-level exposure.

Markets always seem to find new ways to challenge us. This challenge now appears to be coming from the combination of late-cycle valuations for asset classes like credit and U.S. equities, and mid-cycle dynamics in developed economies. Our Russell models and process tell us that the economic cycle will likely win out, and investors should consider maintaining equity market exposure. However, the temperature is rising. It could be a warm northern hemisphere summer, not just for vacationers, but for investors as well. 

1 The “fragile five” emerging market economies include Turkey, Brazil, India, South Africa and Indonesia

Disclosures:

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

Investing involves risk and principal loss is possible.

Forecasting is inherently uncertain and may be incorrect. It is not representative of a projection of the stock market, or of any specific investment.

Diversification, strategic asset allocation and multi-asset investing do not assure profit or protect against loss in declining markets.

Past performance does not guarantee future performance. 

This material is not an offer, solicitation or recommendation to purchase any security.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. 

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.  The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Russell Investments is the owner of the trademarks, service marks and copyrights related to its indexes. 

Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.

Copyright © Russell Investments 2014. All rights reserved.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty. 

UNI – 9410

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What drove this week’s sell-off in equity markets?

This week on Market Week in Review video webcast, Chief Investment Strategist Erik Ristuben explains what he believes is the psychology behind this week’s market sell-off as it relates to first quarter 2014 earnings reports. Communications Director Mark Soupiset hosts this week’s episode, which includes Ristuben’s perspectives on the International Monetary Fund’s (IMF) revised outlook for European growth and why he believes China and Japan remain the key watch-points for investors in Asia.

CORP-9414

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Outlook update: 7 points to watch as 2014 reveals its true character

Russell blog - Global forecast

In the 2014 Annual Global Outlook, we expressed our macro global view that “[e]quity markets appear likely to experience a year of validation more than appreciation—to validate the significant price/earnings expansion that has taken place in 2013.” In essence, we believed then that fundamentals had to come in and validate a market run that had already occurred in 2013.

Today, reflecting upon a first quarter, our global head of investment strategy, Andrew Pease, notes that “the first blushes of improving macro-economic data are beginning to materialize and validate lofty equity price levels, particularly in the U.S. market … we believe wholesale that this trend will need to continue to sustain equity price levels.” In essence, the first quarter has been performing within the “validation” theme parameters we outlined last December.,

So where to from here? Below, we’ve listed our updated views on how 2014 is unfolding (as of March 31, 2014) relative to the Annual Global Outlook:

  1. Our favored signals still point toward global equities over fixed income. Regarding equities, Russell’s investment strategists maintain a slight general preference for dynamic sectors and stocks over defensive sectors and stocks. Within major economies: Japan still appears most favorable, followed in order by the U.S.,emerging markets and Europe.
  2. Valuation indicators: In developed markets, valuations appear a bit less stretched compared to the valuations we saw at end of 2013.
  3. Business cycle indicators favor Europe over Emerging Markets: We see modestly improving data from Europe, the outlook for U.S. growth remains unchanged, and some mixed data has come out of Japan. Meanwhile, emerging markets face continued challenges, such as uncertainty with China’s credit issues and slowing commodity demand.
  4. Sentiment indicators: The indicators that signal the market being overbought/oversold currently appear mostly neutral. Therefore, it appears momentum drives the sentiment score, which remains relatively strong for the U.S., Japan and Europe. In that order.
  5. U.S. Equity Target: Our 2014 year-end targets remain unchanged for the Russell 1000® Index and the S&P 500® Index, at 1,060 and 1,900, respectively.
  6. U.S. 10-year treasury target: We have adjusted slightly our 2014 year-end expectation on the U.S. 10-year treasury yield from 3.2% to 3.4%.
  7. Real assets: We see generally positive signals for listed infrastructure, neutral signals on real-estate investment trusts and relatively more negative signals on commodities.

This update largely confirms the views expressed in our Annual Global Outlook, and offers a snapshot of our quarterly market outlook, which will be released in mid-April.

As we look at the current maturing earnings cycle with its falling correlations, we believe that the second quarter will remain a fertile environment for active management and security selection. And, perhaps most critically, as long as global monetary policies remain committed to squeezing the safe haven investor, a total-portfolio return perspective becomes even more relevant.

We believe this is an environment where investors who engage the market with a globally disciplined, multi-asset strategy may enhance their odds of meeting individual goals.

Disclosures:

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

Investing involves risk and principal loss is possible.

Forecasting is inherently uncertain and may be incorrect. It is not representative of a projection of the stock market, or of any specific investment.

Diversification, strategic asset allocation and multi-asset investing do not assure profit or protect against loss in declining markets.

Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Russell’s publication of the Indexes or Index constituents in no way suggests or implies a representation or opinion by Russell as to the attractiveness of investing in a particular security. Inclusion of a security in an Index is not a promotion, sponsorship or endorsement of a security by Russell and Russell makes no representation, warranty or guarantee with respect to the performance of any security included in a Russell Index. 

The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.

The S&P 500® Index: An index, with dividends reinvested, of 500 issues representative of leading companies in the U.S. large cap securities market (representative sample of leading companies in leading industries).

Standard & Poor’s Corporation is the owner of the trademarks, service marks, and copyrights related to its indexes. Indexes are unmanaged and cannot be invested in directly.

Past performance does not guarantee future performance. 

This material is not an offer, solicitation or recommendation to purchase any security.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. 

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.  The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Russell Investments is the owner of the trademarks, service marks and copyrights related to its indexes. 

Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.

Copyright © Russell Investments 2014. All rights reserved.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty. 

UNI – 9393 

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