The asset-allocation rotation that was witnessed over the past few weeks seems to be over now and the question whether that presaged something more broadly in the market investors really needed to worry about, no longer seems to be the case, said Dan Morris, global investment strategist at TIAA-CREF.
It did seem to be concentrated in the stocks that had done quite well as the big momentum reversed, but it didn’t tell much about the broad market, and the fundamentals remain quite solid, he added.
Asked to explain the strong economic fundamentals, Dan said it has been a benign market for equities. Inflation has been pretty low while GDP growth has been slow but steady, which is good. There’s no imminent threat to the macro-economic environment, be it from Europe or the US Fed. So, US corporations can really focus on increasing profitability since they are good at it, which in turn will drive equity prices through out the year, he observed.
Asked if some of the sectors have been victim of their own good returns, Dan said that starts to happen when investors see how others have done. Then they start to take some of those profits and invest them somewhere else, which may be the reason why the recent decline was not necessarily a more broad-based sell-off.
Even when investors got good returns from a lot of these sectors, valuations weren’t stretched, which supported their earnings growth. So, if investors wanted to re-allocate and had a real fundamental belief for that, this can just be a good opportunity to put down more money, he explained.
Asked why expectations for the quarter have been so modest, despite having a good earnings season, Dan said when the year-end came it didn’t really look like investors would get a lot of earnings growth. But that changed in the first quarter along with the expectations for the rest of the year.
That said it may turn out a bit of a dance for the markets. On one hand, there are too high expectations now for the rest of the year. There are forecasts for margins to increase, which probably is a little optimistic and those are likely to come down. At the same time, investors are likely to see reasonably strong earnings growth. It’s that balance which we have witnessed in the markets this year; broad trend up, but with some volatility with the fundamentals going in the right direction, he noted.
Asked if the markets sprung any surprise thus far this year, Dan answered in the negative saying he knew it would most likely be modest returns this year. Even if an investor likes the general environment, there are no big catalysts that are really going to change the outlook for the markets. Valuations are good and they should not go up too much and get stretched because ultimately they have to reverse that, he argued.
Asked how long yields could stay low with the Federal Reserve deciding to continue tapering on its pre-assigned pace, Dan said that’s a little bit of a mystery given that growth has been modest and inflation has been weak. There was a risk of a quicker take-up since the economy grew at three percent at the end of last year with the expectation it will move to 3.25 percent, which clearly didn’t happen. But if there is a swing in sentiment for higher growth, the markets will find it difficult adjusting to, he explained.
Asked to explain the consequences if the European Central Bank failed to deliver on Quantitative Easing, Dan said it will be reflected in the yields of the sovereign debts. Greece, for example, came to the markets with an issue that probably got the historical close while Portugal has been at the lowest (yield range) in years, which is kind of a bet on the QE. If that doesn’t happen, they are going to get reversed given that yields are so low, he noted.
Asked what could be the source of global threat this year, Dan said it will depend what’s going on in China. The GDP numbers have been published, and though they look good, people are not convinced they are accurate. So if there is something going on that the markets are not aware of, because of the opaqueness of the economy, it seems investors would never have the certainty that they would like to have, he concluded.
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