All Eyes on the Fed... Then Congress (Market Outlook)

By Russ Koesterich, BlackRock Chief Investment Strategist

Market Outlook

The Road Will Get Rockier - Last month, we warned that volatility was likely to rise into September from the summer's more placid levels. The Federal Reserve (Fed)'s surprise September no-taper announcement removed some risk of near-term volatility and took some pressure off rate-sensitive assets. But market volatility is likely to pick up in coming weeks as investor attention shifts toward budget debates in Congress and the uncertainty surrounding the next Fed chair, geopolitical instability and global economic growth.

Though Stocks Can Still Move Higher - While stock gains are likely to remain muted for the remainder of 2013, we expect that the global economy will continue to improve, and global stocks will finish 2013 higher. In addition, stocks still appear reasonably priced relative to bonds and cash.

Supported By Continued Monetary Stimulus - The Fed isn't tapering for now, confirming that the recovery is still fragile. Absent a pickup in jobs growth, we believe that monetary policy will remain accommodative in the United States, as well as in Japan, for the remainder of the year. In addition, because of numerous factors conspiring to keep a lid on rates, we believe that rates will only moderately rise in coming years, though a "taper lite" could still be announced as early as later this year or early next year.

Higher Oil Prices Could Change Our Expectations - While it now seems that a strike in Syria may be avoided, should the violence in the Middle East escalate, higher energy prices could impede the global recovery.

For Now, Investors Should Prepare Portfolios for More Volatility - We generally advocate diversifying portfolios globally and considering more global segments of the US market such as US mega caps. We also like energy companies, which can potentially act as a hedge against Middle-East induced market volatility.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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