Stock Market: Some Volatility in U.S.; Overseas Stocks Remain Attractive

May 8, 2015

The current bull market is now in its seventh year, and the United States now sits at the helm of global economic expansion. This remarkable run – the fourth longest in more than a century – is even more noteworthy when you consider the naysayers began predicting its demise from the get-go. Overseas, the Eurozone is showing signs of slow economic improvement as the European Central Bank has stimulated growth with easing policies similar to those deployed earlier by the Federal Reserve. Anticipation surrounds the Fed, and some believe that long- awaited interest rate increases might be in place by summer. Mulling all these issues, investment gurus are predicting a generally favorable investment scene for the last half of 2015. Here’s an overview of some of those viewpoints:

Sheltered somewhat from the pressure of a stronger dollar in the global market, small-cap equities led the solid stock market performance during the first quarter of 2015 in the United States. Some investment professionals expect U.S. equities to continue to perform reasonably well in the next quarter, but note that performance will vary significantly by sector. Many foresee modest returns, and note that stocks that are “domestic-centric” (i.e. U.S. companies whose sales and profits come primarily from U.S. customers) can be expected to outperform those whose fortunes are affected by the decline of overseas currencies against a strong dollar. Not surprisingly, in the United States weaker oil prices have hurt energy stocks, while consumer discretionary stocks and the healthcare sector showed gains.
Speculation regarding the Federal Reserve’s timetable for raising interest rates remains high. Whatever the timing of rate hikes, at some juncture the current bull market will run out of steam. U.S. stocks are becoming expensive. With this in mind, some analysts are encouraging investors – made nervous by memories of the last two major market reversals – to bear in mind that when a market reversal comes, it is unlikely to be like those we experienced in 2000 and 2007. These were among the toughest reversals seen in the stock market since its performance has been plotted, and it is unlikely we’ll see anything as drastic considering the strength of our economic recovery.
Many analysts are predicting increasing volatility for the U.S. markets. Some are suggesting (again) that we are due for a market correction – though most believe the next bear market will be tamer than the last ones. Should an individual investor take action now to get prepared for a downturn? Some analysts think it might be time to rebalance your portfolio, although it’s likely your investment strategy has evolved since the onset of the current bull market anyway. If you are thinking along those lines, consider the price to earnings (P/E) ratio of the stocks you hold. Those with the highest ratios – usually small- or mid-caps – potentially could be the ones that fall the most when the market turns bearish. It’s never a good idea to rebalance a portfolio without careful consideration of your specific situation, so get expert advice from your professional tax and investment advisors before taking action.

Following the earlier precedent set by the Federal Reserve in the United States, some 30 similar institutions in Europe, Japan and China eased monetary policies during the first quarter of 2015. While we in the United States are well on the way out of a recessionary period with quantitative easing about to conclude, in the Eurozone and in Japan economic recovery lags behind the U.S. rebound. Central banks overseas are still in the midst of quantitative easing efforts designed to keep interest rates at rock bottom. Because of this, and because stock prices here are on the rise, some investment experts are encouraging clients to look at overseas equities, especially those from Japan and the more developed countries of Europe where stock prices remain attractive.

As always, predictions regarding the market’s performance include a range of opinions. The commentary above is general in nature. It is not intended to be a substitute for guidance and advice from professional tax and investment counselors.