Equities Remain Attractive Despite Market Volatility

Market Updates

Equities Remain Attractive Despite Market Volatility

Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, discusses why equities may continue to perform well.

September 23, 2016

Equity market volatility returned in September after an extended period of quiet trading during the months of July and August. Investor positioning in anticipation of global central bank policy actions has been the main catalyst for the newfound volatility.

Fed commentary has been leaning more hawkish and interest rates (U.S. 10‐year) have risen from 1.37% after the Brexit vote to 1.75% at a recent peak. The Fed statement at the September 21 policy meeting raised the odds of a December rate hike. At the same time, the “dot plot” of future fed funds levels moved lower. Equities rallied on the day probably due to the reduction in the dot plot.

Other central banks have contributed to volatility as well and are likely to do so in the period ahead. The European Central Bank (ECB) disappointed by not expanding bond purchases at the most recent meeting, and yields across Europe have moved slightly higher. Elsewhere, the Bank of Japan (BOJ) shifted its strategy on September 21, as they are now targeting a 10‐year government yield of 0% (vs. the current market yield of ‐0.30%) while committing to an overshoot of the current targeted inflation rate of 2%. Thus far, the aggressive actions of the central bank have rendered little success, as inflation and GDP growth remain anemic. For this reason, confidence in them achieving a 2% inflation target will remain low. Missteps by any of the central banks or a loss of investor confidence of their activities leaves the equity market vulnerable to pullbacks. Generous valuations for U.S. stocks increases the risk.

Although central bank policies are shifting, equities are likely to remain well bid as a rapid, sustainable move higher in rates does not seem plausible with global growth sluggish. For this reason, we believe U.S. equities are likely to continue to be attractive as long as the economy does not slip into a recession. With job growth and consumer spending healthy, a recession appears to be a low probability for the near term.

The U.S. election season is hitting full stride and may render some influence over equities in the period just ahead. Trump has cut into Clinton’s lead in recent polling. Continued gains by the Republican candidate could feed into volatility given the candidate’s “shoot from the hip” personality and lack of clarity regarding his agenda.

Technically, broad internal participation off the February and June lows is a much healthier backdrop than seen when the equity market made a new high in the summer of 2015. For this reason, the intermediate trend looks healthy and pullbacks should not roll over into a new downtrend as long as the economy continues to advance. For the very short term, the technical breakdown in price as a result of the 2.5% selloff on September 9, 2016 leaves the market vulnerable to additional profit taking. With the prevailing intermediate‐term trend healthy, the odds are high any pullbacks are likely to be minor. We are focused on support on the S&P 500 in the 2120 to 2060 area.

In sum: The return of volatility is likely to remain over the next few months due to potential shifting of global central bank policies and potentially the election season. However, with market internals healthy, periods of weakness can be accumulated, in our view.

Opinions expressed are not necessarily those of Raymond James. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. It is not possible to invest directly in an index. The S&P 500 is an unmanaged Index of 500 widely held stocks.

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