Russ Koesterich, CFA

Disposable income refers to the income available to a household or individual after paying off personal current taxes. Disposable income is still below historical averages.

Today, most measures of credit conditions are positive, with tight spreads across all of fixed income. Even high yield spreads have come in after a short scare last month.

The great American deleveraging has largely been limited to the financial sector (XLF) (IYF). Non-financial debt is still much higher than historical averages.

Valuations are at the higher end of their historical range. Investors should avoid defensive sectors, which are highly sensitive to interest rate changes.

According to estimates by EuroStat, Greek debt stood at more than 315 billion euros at the end of September 2014.

After September’s strong jobs numbers, a Fed rate hike could be on the horizon early next year. Russ explains two equity market implications.

We’ll explore whether record highs signal a top for equity markets or whether there’s still some room for growth in the current bull market.

I would pay particular attention to the Shiller P/E Ratio, which is a variation on the Cyclically Adjusted P/E or CAPE. This indicator is worth watching as it has historically correlated with long-term stock market returns.

The CBOE Volatility Index suddenly rose 6.0% on November 9, 2016, after it was clear that Trump had unexpectedly clinched the election.

Rising stocks have been buoyed by various factors, including the accommodative monetary policy of the Federal Reserve and robust US corporate earnings.

So what should investors be doing today? While inflation may take another year or more to get going, it’s not too early to start implementing long-term inflation hedges.

Recent readings have shown that inflation has stabilized, which is a good thing, but signs of an imminent acceleration in inflation are still scant.

After a year with relatively less drama, European politics are likely to return to center stage next year.

Utility sector valuation appears stretched. 2014 was a great year for utilities, which gained 26.62% ex-dividends and were the best-performing sector.

The number of people above 65 years is expected to triple from 531 million in 2010 to 1.54 billion in 2050—the population of seniors in the U.S. (IVV) (SPY) is expected to more than double and increase from 41 to 86 million in the same time period.

Holding cash is risky, as it provides negative real returns in the long run.

With growth projections of most major economies falling, it is likely that volatility will stay elevated.

Major central banks are now diverging in their monetary policies, a dynamic we saw vividly on display last week with the Federal Reserve ending its quantitative easing (or QE) program, while Japan expanded its version of QE.

Weakness in the labor market means low interest rates. The US economy is gaining momentum with stellar growth rates in the last two quarters. It grew by 4.6% in 2Q14.

Wage growth could cause rates to rise. A hike in wage rates could boost consumption and encourage individuals outside the labor force to join. This will increase disposable income.

Developed markets are offering value. The Eurozone has come out of the recession and is seeing some green shoots of growth.

Weak global demand and a strengthening dollar have affected oil prices.

With classic safe havens providing little protection, turn to financials and healthcare sectors for opportunities. Healthcare stocks usually hold up well in the run-up to a rate hike.

While valuation is important, investors should also pay attention to sentiment. The goal is to gauge how – to steal a phrase – “irrationally exuberant” investors have become.

Much like US consumers, Australian consumers are in the process of repairing their balance sheets.

A weaker euro could lead to inflation in Europe. The depreciation in the euro was initially due to the appreciation in the dollar.

Although not considered safe haven assets, in the current context of high geopolitical risk and consequently volatility, investors could consider investing in sectors like energy and large cap companies.

Inflation remains subdued by all measures. Since inflation is way below the Fed’s long-term target, the Fed can afford to keep interest rates lower for a little longer.

Slower growth has a silver lining: the potential for greater monetary and fiscal stimulus.

DJTI’s price-to-earnings ratio climbed from 15.7x at the start of 2013 to 20.2x at the end of 2014. This year, transportation stocks (IYT) have taken a hit, leading to multiple contractions.

A stronger dollar is a headwind for export-oriented stocks. The US economy is relatively robust.

While volatility fell over the course of August, the VIX’s daily average for last month was approximately 15% higher than its average over the previous three months.

The Chinese market slump is not likely to dampen consumer spending or affect the economy. Stocks make up a mere 15% of Chinese household financial assets.

Truth: Emerging markets offer value. Given that they’re generally growing faster than their developed world counterparts, emerging markets still look cheap by most metrics.

Real US rates have been climbing, while rates are falling in much of the rest of the world. As Russ explains, this divergence has a number of implications for investors.

A market rebound of more than 12% from the depths seen in October has left investor sentiment buoyant.

As earnings reports and analyst call transcripts show, many of the companies reporting sales misses cited the strong dollar as a contributing factor.

In an environment of generally decent, albeit recently disappointing, growth and gently rising yields, high yield offers attractive potential in a yield-starved world.

As we’ve suggested throughout this series, US stocks don’t have a clear growth catalyst once interest rates rise. Still, you may find value in select sectors such as financials and technology.

The fraction of total gold output held by central banks around the world has continued to decrease over the last decade and a sharp reversal in this trend is unlikely.

Currently, the S&P 500 is giving year-to-date (or YTD) returns of more than 8%. It posted gains for seven consecutive quarters. The S&P 500 Index (SPY) closed at a new high 34 times in 2014.

Although tech stocks have been buoyant in 2015, we don’t think that this means the advent of dotcom bubble 2.0. There are some key differences.

Many structural considerations are likely to keep yields low in the future. Demand for Treasuries and bonds is likely to be more than the supply in the next two years.

While a traditional emerging market benchmark is up 1.5% year-to-date, frontier, or “pre-emerging” markets, have been performing well.

High-dividend emerging market funds offer a cushion when you face market volatility.

The federal funds rate is a tool that the Fed uses to control the interest rate in the economy. The rate has been close to zero for over six years.

A softer rebound could move markets in the second quarter. If the economy remains weak in the second quarter, the Fed has some leeway to maneuver the rate.

Bad news may be good news for international stocks. Europe is struggling with deflationary headwinds and Japan is suffering under the burden of last April’s hike in the consumption tax.

Although inflation is low, it’s a good idea to have a small amount of inflation hedge in your portfolio. A small inflation hedge adds diversification.

Municipal bonds (or munis) were the best performers in 2015 with returns of 3.2%. Meanwhile, investment-grade corporate bonds (LQD), long-dated Treasuries (TLT), and high-yield bonds (HYG) all gave negative returns in 2015.

Emerging market dividend payers are offering value, given their high volatility.

Within the United States, I recognize opportunities, particularly in large cap, cyclical names. On the fixed income side, high yield now represents an attractive option given recent spread widening.

The performance of gold as a contrast to the S&P 500 is reflected during periods of high and low volatility. The S&P 500 has always outperformed gold since April 10, 2013, during periods of both high and low volatility.

If you’re preparing your portfolio for the short term, the allocation to cash should be high. As the horizon increases, allocation to cash should go down.

The economic make-up of the US has changed significantly over the past century, making the Dow Theory less applicable today than it might once have been.

The longer term outlook for Eurozone banks does look more positive than a year ago given reasons including the substantial deleveraging, capital raising by local banks and the European Central Bank (or ECB)’s recently announced ABS purchase program.

Industrial commodities are likely to see lower prices as demand falls with slowing global growth. Yet a decent entry point doesn’t seem to be on the horizon.

Oil prices are expected to be lower for longer. This is bad news for high yield bond funds (HYG) (JNK) in the United States.

We can expect muted returns from US equities going forward. US stocks face the prospect of higher interest rates, albeit gradual and from unusually low levels.

The stage is set for the next act in the Greek political drama. With the anti-austerity Syriza firmly at the helm of affairs, it will be a turbulent ride for the Eurozone.

Excessively low rates have side effects. Treasury yields have been beaten down due to the Fed’s excessive buying. Currently, the ten-year Treasury (IEF) yields are 2.1%.

Meanwhile, outside of the jobs report, other U.S. economic releases are painting a consistently positive picture of the domestic economy.

Rich valuations and higher rates are a lethal combination for stocks. Over the longer term, multiple expansion and tightening lead to negative returns.

As yields rise and the Fed poises to hike rates later this year, it makes sense to avoid rate-sensitive segments of the market like utilities (XLU) and staples (XLP).

US stocks appear unattractive despite the recent correction. A stronger dollar (UUP) and a slowing world has negatively affected large-cap earnings.

With the recent fall, some of these emerging markets have certainly become very cheap compared to most of the developed markets.

The talk about the commodities slump (USCI) is almost ubiquitous. It is hard to ignore the freefall most commodities (DBC) seem to have been in during the past year.

Monetary policy has been one of the main catalysts of this bull market. These returns were mainly aided by the ultra easy monetary policy.

Emerging market small-cap stocks offer exposure to consumer sectors. EEMS has 18% exposure to consumer discretionary stocks.

We think the final tally for holiday retail sales could differ from the gloomy picture some of the initial estimates had painted.

Adding carry to your portfolio in a low-return scenario could cushion your portfolio.

The improving economy still faces long-term structural issues like slow wage growth, below-trend consumption and a shrinking labor force participation rate.

Even though the March jobs report came in lower than expected with only 126,000 job additions, the labor market recovery looks extremely robust.

High yield bonds have come under pressure lately, and as a result, are now looking relatively attractive. Spreads recently widened out to the highest level in a year.

The possible ramifications of a Grexit include devaluation and even a complete breakdown of the currency.

EEM stocks are better insulated from slowing global growth. The fund is exposed to global sectors.

For investors, the implications are not to load up on bonds, but to tactically look for areas of relative value within fixed income.

Consider overseas stock exposure, as US markets look less attractive. Chinese stocks gave returns of 17% YTD. This is due to excess liquidity in equities.

The high volatility regime will likely be the norm in the future. State Street observed that the US market has already clocked 42 highly volatile days in 2015.

The supply side is adding to energy sector headwinds (IXC).

While I still believe that the precious metal should be a part of a diversified portfolio, I see four reasons why gold prices are likely to decline going forward.

One of the main reasons behind the bond sell-off last week was a rise in inflation expectations. The ten-year break-even inflation rate increased to 1.94% on May 1, 2015.

Emerging markets also appear cheap at the moment compared to US stocks. EEMS is likely to be more volatile (VXX) than EEM.

It’s important to note that higher real yields, not rising inflation, are driving today’s higher nominal yields as investors are demanding more compensation for holding bonds

The demand for commodities has been dampened by a variety of factors, particularly in the last two years.

Interest rates and bond yields are already at very low levels. Inflation could pick up and lead to a rate hike. So, bonds could underperform going forward.

High US equity valuations are weighing on investor sentiments. The United States is trading at 100%, 50%, and 74% premiums over Japan, Europe, and emerging markets, respectively.

Economic growth is strengthening in some parts of the world, while it’s slipping in others. In other words, as I mentioned in a post earlier this week, the major trend in the global economy is one of increasing divergence, rather than slower growth.

The current bull run is among the top five longest in history. Since World War II, the average bull market run has lasted 58 months.

The US economy added ~215,000 jobs in July, compared to ~260,000 in April and ~231,000 jobs in June. Although this number is dipping, it is still above the 200,000 mark, which is usually seen during economic booms.

Keep a close eye on further developments in the unfolding Greek debt drama and hope that it does not turn into a tragedy.

The Chinese sell-off sparked concerns about how the crash will affect economies all over the world. China makes up 11.3% of the global economy and is a huge consumer of resources.

Increasing correlations between risky assets could leave your portfolio vulnerable.

But while the currency has been range bound for the past two years, there are three reasons why I would expect a stronger dollar over the next year.

In the short term, recent market action isn’t as irrational as it might appear. First, there’s no clear link between these events and near-term economic or earnings growth.

EM countries become less reliant on short-term foreign capital funding, as evident in improved current account balances and a shift toward longer-term foreign direct investment.

Research shows that another cause for why wage growth continues to stay low is that employers are reluctant to reduce wages.

Although better economic data over the next few months could support stocks, negative cues from Europe, the Middle East, or China could send stocks tumbling.

Global equity markets (EFA) have been on a rollercoaster ride for the past few months. The sharp fall in stocks last year was initially triggered by fears of a hard landing in China (MCHI).

TIPS may offer some value as inflation breakeven seems modest. TIPS provide investors a hedge against inflation just like gold (GLD) and other commodities (DBC).