Ask our strategists a question
You constantly drill that fundamentals drive everything. With earnings being up and the Fed Tapering, how does this affect the fundamentals of sticking with a portion of a portfolio staying in bonds?
I think January is a terrific example of why you always want bonds. Long US Treasury bonds returned 6% while equities across the board were negative. Bonds offer diversification and risk control. The fundamentals – earnings - are coming in better than expected. I expect 2014 to be the highest level of corporate earnings ever and I anticipate the market will go up. However, the path up is not always straight and there will be more market volatility as the Fed hands the reigns back over to the market. Global Perspectives advocates a broadly diversified portfolio of both stocks and bonds.
Is China going to be a problem?
We are indeed watching China with a close eye. They are the world’s second largest economy and a huge driver of growth. Their GDP growth slowed in 2012/2013 but that was not unexpected based on the double digit growth rates they had been reporting. But I am more concerned about their credit bubble. The government has made cursory attempts to slow down credit but the problem is growing and we may see trouble when these loans come due. So China may very well be a problem. This is one of the global risks we advise investors to watch in our Global Perspectives materials.
Do you believe that the VIX is a good indicator or the market's direction?
The VIX is often called the fear gauge and usually spikes when we see the market plummeting but I don’t think it is a good predictor of overall market direction. The driver of markets is fundamentals – namely corporate earnings. When earnings are growing year over year, markets will generally head upwards. We have seen very low volatility over the last couple years. I anticipate an increase in volatility as the Fed tapers and essentially hands control of the market back over to the market.