During the webcast, we explored the economic, fixed income and equity trends that we think will drive the markets in the new year. Here are some highlights.
Economic overview
- Aside from the United States, which is near cycle highs based on manufacturing purchasing managers’ indices, the major regions of the world are marginally positive or flirting with contraction.
- The outlook for US consumers appears to be brightening, especially as falling gasoline prices have put more money into their pockets, while businesses are finally beginning to reinvest after years of underspending on their capital stock.
- From the evidence of third-quarter reporting season, we see that companies have continued to do extremely well in terms of earnings growth and net margin expansion.
- One risk to our positive outlook is that wage increases could force the US Federal Reserve to tighten more quickly, hampering economic growth and triggering corporate profit margin deterioration.
Fixed income
- We think global liquidity from the major central banks will continue to expand and low yields in other developed markets will help to anchor the long end of the US Treasury curve, providing the Fed with a window of opportunity to raise interest rates in 2015.
- Falling market-based inflation expectations and global disinflationary forces could keep the Fed from acting sooner, but we caution against putting too much weight on these inherently volatile measures that are closely related to short-term noise in commodity markets.
- The anticipation of a Fed hike has tended to induce market volatility, which we believe creates the potential to take advantage of attractive valuations during selloffs— for example, higher-quality high yield and emerging market debt.
Equity
- Total returns have been stronger for US stocks than non-US stocks, but the pattern of outperformance across sectors has been similar.
- Based on price to next-12-months’ earnings ratios across major regions, valuations generally appear fair in developed markets and cheap in emerging markets, though we caution against using such a broad brush to paint a picture of these markets.
- Since mid-2012, both prices and valuations have expanded in the US equity market, while corporate earnings have kept pace with price increases until recently.
- Both equity performance and risk can be sourced from a number of factors that vary over time, so as active investors, we try to stay vigilant in our risk management practices.
- Recognizing that an exogenous shock from the fixed income market has the potential to derail the equity rally, we have been closely monitoring liquidity, which has deteriorated markedly — particularly among corporate bonds — with the Dodd-Frank regulations introduced after the financial crisis.
Watch a replay of the full webcast.
No forecasts can be guaranteed.
The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.
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