We view the overall investment environment as positive for equities, however we expect volatility to linger the rest of the year and low to modest returns heading into 2019. We believe investors with a dynamic approach will benefit most by actively modulating asset classes and positioning themselves in growth sectors. Looking forward we’ve broken down three investment themes for our Mid-Year Outlook to watch.
Heightened Volatility: After an extraordinary calm 2017, volatility is back and the CBOE Volatility Index $VIX is up nearly 40% this year. The S&P 500 experienced a record stretch without at least a 5% drawdown until the equity contraction hit in late January. In the near term, the selloff has brought us to a better balance of risks and hence a more optimistic outlook. We do expect to see more frequent sell-offs giving rise to opportunities for active investment strategies, but not an outright shift to perpetual volatility. The sources of further volatility are likely to come from fiscal and monetary policy news. We also recognize a number of geopolitical risks that could trigger more spats of volatility.
Rising Rates: In 2017, the Federal Reserve raised interest rates three times and this year we expect another two or three rate hikes. Five years ago, yields on Vanguard’s Prime Money Market Fund (VMRXX) were in the neighborhood of 0.06 percent. Today because of rising interest rates, the yield on this $12.7 billion fund is 1.84 percent and retirees can rejoice because its providing a much-needed boost to money market fund yields. In May 2018, the Fed held interest rates steady at the conclusion of its two-day policy meeting. Noting “risks to the economic outlook appear roughly balanced,” and the official statement from the committee gave no indication that Fed officials plan to raise rates faster than previously telegraphed. As it stands now, most observers expect a total of three interest rate hikes this year. But changes in the economy can prompt the Fed to act differently, increasing the uncertainty and the volatility in the stock market.
Emerging Markets: On June 1st China made a symbolic move, appealing to global investors as they debut close to 230 China A shares on index provider MSCI’s emerging markets benchmark on Friday, a move investors expect will attract billions of dollars in inflows to the mainland market. According to analyst notes at JPM “China’s equity market now officially enters the global space.” Brave investors with a long-term outlook should consider emerging markets as a core holding because of accelerating economic growth. According to Goldman Sachs emerging markets is expected to contribute over 70% of global GDP growth between 2015 and 2025, and they estimate that as 1.2 billion people in EM rise into middle and high-income classes over this 10-year period, real consumption should more than double.
In conclusion, we have a positive outlook on risk assets heading into 2019 and believe the full effect of the U.S. tax overhaul will be the next catalyst for market appreciation. The nine year bull market continues to chug along and we aren’t giving up on it.
BlackRock 2018 Mid-Year Outlook https://www.blackrock.com/investing/literature/whitepaper/bii-global-investment-outlook-q2-2018-us.pdf
GSAM 2018 Mid-Year Outlook https://www.gsam.com/content/dam/gsam/pdfs/common/en/public/articles/outlook/2018/GSAM_2018_Mid_Year_Investment_Outlook.pdf?sa=n&rd=n
TD Ameritrade: Uncertainty Rising About the Fed’s Move After June Meeting | Investopedia https://www.investopedia.com/news/td-ameritrade-uncertainty-rising-about-feds-move-after-june-meeting/#ixzz5HBNk4O3d