How to consider positioning portfolios. In our view, stocks in general could continue to rise despite higher volatility, and as we have advocated for some time now, for some investors, stocks may still make better investments than bonds for the longer term. We do not expect the Fed’s upcoming rate hike to have a detrimental impact on financial markets over the longer term, and for markets in Europe, Japan and select Asian emerging markets, central bank accommodation in those countries should continue to support stocks. But in the US, while we believe improving economic conditions should continue to support US stocks over the next year, their stretched valuations make lackluster returns more probable for the next year or so.
Market Realist – Consider overseas stock exposure, as US markets look less attractive.
The graph above compares the performance of ETFs that have exposure to stocks from various economies. The S&P 500 (SPY) has given muted returns this year—due to a number of headwinds. This includes a stronger dollar (UUP). It put pressure on large-cap companies’ earnings. Lofty valuations have also made investors wary. SPY has only returned 2.8% YTD (year-to-date). In comparison, other major markets outperformed the S&P 500.
Chinese stocks (FXI) have given returns of 17% YTD. This is due to excess liquidity that found its way to equities. Meanwhile, Japanese (EWJ) and European stocks (EZU) have performed well—spurred by QE (quantitative easing) in both economies. They have given returns of 15.9% and 7.8%, respectively. Emerging markets (EEM) have also rebounded with returns of 6% YTD. Russian stocks rebounded in 2015, after a jump in oil prices. The VanEck Vectors Russia ETF (RSX) gave returns of 29.5% YTD.
It’s likely that the S&P 500 will continue to outperform these markets. With the Fed likely hiking rates, most of the other major central banks are in the process of easing. This will support their respective markets.
Read When Should You Expect the Fed’s Next Rate Increase? for more on how tighter monetary policy will affect your investments.