Last week’s stock-market returns were downright salubrious, buoyed by the continued halo effect from the tepid September jobs report. The Dow gained 3.72%, the S&P 500 Index rose 3.26% and the Russell 2000 Index gained a whopping 4.6%. Commodities also rallied last week, with the prices of oil and gold up notably.
It turns out that last week was the best of the year for US stock performance—hard to believe given all the headwinds facing the markets today.
Geopolitics
For starters, the geopolitical environment both within and outside of the US is turbulent, to say the least.
Two weeks ago, we barely escaped a US government shutdown only to see the heir apparent to the House speaker position—Kevin McCarthy—take himself out of the running last week. Republicans in Congress are left with a leadership power vacuum and don’t have a clear choice to fill it. Given that the market doesn’t like uncertainty, stocks would normally be expected to sell off—especially since the latest D.C. developments increase the chance of a government shutdown in the near future.
Outside of the US, the Russian military’s entry into the conflict in Syria has created significant complications in the Middle East—particularly given that Russia is reportedly not just bombing Islamic State group targets, but Syrian rebel targets as well. Add to this mix the tragic twin suicide bombings in Turkey, and you have the makings of some serious downward pressure for equities.
Emerging markets and earnings
The geopolitical situation is certainly tough, but we haven’t even touched on the economic environment:
- There is still great uncertainty surrounding China’s deceleration and how significant it is, and that is only adding to growth concerns of other emerging-market countries.
- Earnings season appears likely to be quite bleak. Third-quarter earnings could decline by more than 5%, according to FactSet, which would constitute the first back-to-back earnings declines since 2009.
- Even if you’re not superstitious, don’t forget that the month of October is typically viewed as the equivalent of the number 13 for stock-market investors.
Jobs report
So what’s fueling this “risk-on” environment? It seems that the catalyst for our latest rally was the September jobs report, which was viewed by many market participants as the final nail in the coffin of a possible 2015 rate hike.
But we haven’t seen anything definitive in the way of hard data—not to mention read anything in the most recent FOMC minutes, or even heard anything in US Federal Reserve Vice Chair Fischer’s speech this past weekend—that closes the door on a possible 2015 rate hike.
Investment ideas
So where do we go from here? We wouldn’t be surprised if the market’s latest upward move—which was already starting to abate at the end of last week—began to reverse, so investors should be prepared.
Looking ahead, here are three ideas to consider implementing over the next few months:
- The short-term but powerful market swings should continue, which underscores the benefits of employing an actively managed multi-asset portfolio that seeks to manage risks while capitalizing on opportunities. It’s important to invest in risk assets, but passive exposure means not just participating in upside potential, but not managing downside risk as well.
- Within stocks, we are seeing a volatile bottom building in equities, and the next few weeks could see some giveback of US stocks’ recent gains. Emerging-market equities could outperform in the short term given that valuations are attractive and sentiment appears to be supportive; however it’s important to be selective in this space. Within US stocks, favor small caps: They are more likely to derive more of their sales from within the US, where the relatively strong dollar will not hurt their earnings.
- There are opportunities in commodities, particularly energy. They were oversold and may have hit their inflection point. Even if they haven’t, current levels represent an attractive entry point.
Most importantly, investors shouldn’t be overly influenced by individual pieces of data. Instead, look at the mosaic of data and what it tells us about the US economy and the implications for FOMC policy. One jobs report does not an entire economy—or Fed decision—make.
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.
A Word About Risk: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets. Investments in smaller companies may be more volatile and less liquid than investments in larger companies.
Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585, us.allianzgi.com, 1-800-926-4456
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