A Good Friday look at a good week

On this week’s Market Week in Review video webcast, Chief Investment Strategist Erik Ristuben discusses the strong week in U.S. equity markets and what he believes corporate earnings say about stock valuations and winter’s impact on the economy. Communications Director Mark Soupiset hosts this week’s episode, which also covers Ristuben’s views on what a sanctions war between the West and Russia over the Ukrainian situation may mean for markets there, as well as his perspectives on Emerging Markets returns globally. 


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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


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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.


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