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Market commentary

Brian JacobsenBy Brian Jacobsen,
Ph.D., CFA, CFP®,
Chief Portfolio Strategist

If you’re looking for investment opportunity in 2015, follow the diverse policy paths of the central banks. European policymakers are beginning to reverse contractionary policies. Japan is trying to reboot its economy through structural reforms. China is navigating a reduction in its growth rate to more sustainable levels. The U.S. Federal Reserve (Fed) is poised to pull off a reduction in monetary accommodation without swinging too far into tightening. Inflation—except in select places like Russia and Venezuela— is at bay globally. While monetary policies may point in different directions in 2015 across the globe, the divergences are mixing to create an environment of low inflation, accommodative monetary policy, and moderate growth.

In stocks, we believe market leadership will move from the U.S. to foreign markets. U.S. stocks had a tough start to 2015. Analysts’ expectations for future earnings of the S&P 500 Index, which had been rising since 2012, slipped lower in the beginning of 2015. Downward earnings pressure could persist and could result in the first 10% correction of the S&P 500 Index in four years. Corrections are not always bad news; consider using any weakness as an opportunity to add to positions in U.S. and European stocks.

We believe that the recovery of the American consumer can combine with strong quantitative pressure in Europe and Japan to spread global growth. European stocks, in particular, have been inexpensive relative to U.S. stocks due to a combination of intended fiscal restraint and lackluster monetary stimulus to counteract that restraint. This may change if stimulative monetary policy from the local central bank buoys stocks, as has happened in the U.S. in the past.

In bonds, we think 2015 will look like the past two years, with some volatility around the timing of the Fed’s plans to lift rates from zero but with limited increases in yields, whether investment grade or high yield. Domestic bond markets are likely to remain under the influence of two opposing forces in 2015. Demand for U.S. securities from foreign investors should tend to keep yields low, while the prospect of a shift in Fed policy may tend to push yields higher. We expect the Fed to slowly increase the federal funds rate later this year.

What can investors do?

  • Look for growth overseas: We believe valuation trends could favor foreign stocks—European stocks, in particular—over U.S. stocks. Remember to stay diversified from geographically dispersed investments. In addition to overweighting developed markets, consider adding moderate exposure to emerging markets.

  • Tilt toward growth sectors: In addition to foreign stocks, think about a tactical tilt to sectors poised for growth. Look for opportunities in technology, where the upgrade cycle may not have ended, or financials, which could be helped by potentially higher short-term rates.

  • Pay attention to yield: Look for value in high-yield bonds and focus on interest income rather than holding low- or no-yield investments, such as cash equivalents. Consider emerging markets bonds for diversification. Wait for higher yields and wider spreads in the international, municipal, and investment-grade markets.

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