Investment Directions – May 2013
- Can the Rally Continue?
Global stocks advanced in April and early May as investors focused on positive economic news, upbeat earnings reports and central banks' continued accommodative monetary policies. The key question on investors' minds now: Can the global rally continue?
- Our Answer: Global Stocks Are Likely to Finish 2013 Higher, but Expect Slower Gains and More Volatility
The market's recent rally seems overdone considering that weak global manufacturing data, the delayed impact of the sequester, and tepid US job creation and income growth all point toward slower global growth in the second quarter. Though economic growth, developed markets' low inflation and accommodative monetary policies should support risky assets this year, we expect the pace of equity gains to moderate and volatility to increase in the coming months.
- Still, There Are Four Scenarios That Could Lead to a Correction
• Europe's fragile banking system sparks a eurozone crisis flare-up.
• US economic data and corporate revenues continue to disappoint.
• The Federal Reserve (the Fed) starts to gradually take its foot off the
monetary accelerator before midyear.
• An unknown exogenous shock occurs.
- Meanwhile, Stick With Equities Over Bonds
Despite the rally, most traditional valuation metrics still suggest that global stocks appear reasonably priced relative to their own historical valuations and cheap compared to the alternatives, particularly cash and bonds, which are unusually expensive thanks to central bank buying.
- Yes, Rates Are Likely to Rise, But Modestly
We do not expect the Fed to change course soon, assuming today’s slow US economic growth and low inflation continue. We do foresee a moderate rise in rates this year, to about 2.25% for the 10-year Treasury note, as the US economy continues to normalize. But the path of rates will likely remain volatile.