Equities Advance Again, But Risks Lurk on the Horizon

Key Points

▪ Equity markets advanced last week as oil prices continued to rise.

▪ Economic data have improved over the last month and recession fears have faded.

▪ Our long-term outlook for stock prices remains positive, but we are more cautious about near-term prospects.

Equities posted a fourth consecutive week of gains for the first time since last November.1 The S&P 500 Index was up 1.2% due in part to yet another increase in oil prices and a positive reaction to the European Central Bank’s policy easing announcement.1

Investor Skepticism Remains High
Since its low of 1,810, the S&P 500 has surged 11%, rising more than 200 points in less than a month and nearly erasing losses from earlier in the year.1 Despite (or perhaps because of) the gains, investors remain skeptical about the prospects for stock prices.

In some ways, conditions have improved over the past month. U.S. economic data look more solid, worries about China have faded and global monetary policy is more accommodative. On the other hand, valuations now look less compelling, corporate revenues are under pressure and it is uncertain how long the oil price rally can continue unabated. For the time being, we think risk assets will continue to be buffeted by the multiple crosscurrents as investors look for signals that long-term economic conditions could improve.

Weekly Top Themes

1. The ECB easing package exceeded market expectations.
Investors were initially skeptical about the ECB’s decision as the prospect of negative interest rates was raised. On Friday, however, markets focused on the positives, which drove equity prices sharply higher.

2. The U.S. economy appears to be accelerating.
We expect first quarter growth may show improvement as a result of lower gasoline prices, lower mortgage rates and higher consumer spending.

3. We expect the Federal Reserve to be noncommittal at this week’s meeting.
The central bank will likely indicate that future rate increases are still forthcoming, although we do not expect policymakers to provide specific timing.

4. The U.S. high yield bond rally may continue.
High yield sectors advanced over the last month thanks to rising oil prices and stronger economic growth.1 Unless the United States enters into a recession (which we think is highly unlikely), we expect high yield will continue to outpace the broader bond market over the coming 6 to 12 months.

5. Value-oriented stocks could continue to make gains. During the recent rally, market leadership has shifted from momentum styles to value. Looking ahead, we think continued economic strength suggests this trend will continue.

Equities May Consolidate as Markets Await Clarity
Given all of the crosscurrents, where are markets heading? Over the long-term, we still expect equities to outperform bonds and cash. The economic outlook is better than it was a month ago and fears of recession have faded. Labor market improvements in particular suggest the U.S. economy remains in decent shape. The corporate earnings outlook remains troubled, but we think growth should be strong enough to allow for equity market gains over the coming year. The short-term outlook is cloudier. Pockets of weakness continue in the global economy, China is not out of the woods, the global political backdrop remains a wildcard and investors are rightfully wary of renewed oil price volatility. Stock prices have come a long way in a short time. While we expect gains will continue over the long term, we would not be surprised to see a near-term consolidation as investors await signs of improving global economic growth.

1 Source: Morningstar Direct and Bloomberg, as of 3/11/16

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The Nasdaq Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market. FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. Deutsche Borse AG German Stock Index (DAX Index) is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. Hong Kong Hang Seng Index is a free-float capitalization-weighted index of selection of companies from the Stock Exchange of Hong Kong. Shanghai Stock Exchange Composite is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. MSCI EAFE Index is a free float-adjusted market capitalization weighted index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. Barclays U.S. Aggregate Bond Index covers the U.S. investment grade fixed rate bond market. The BofA Merrill Lynch 3-Month U.S. Treasury Bill Index is an unmanaged market index of U.S. Treasury securities maturing in 90 days that assumes reinvestment of all income.


The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Noninvestment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Past performance is no guarantee of future results.

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