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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.
About Ulli:
In 2000, and in 2008, in the midst of apparent market expansion, Ulli’s methodology directed him and his clients to the safety of the sidelines just before the beginning of the brunt of the bear market. Ulli has written countless articles on investing and the very popular e-book “How to beat the S&P 500…with the S&P 500”
Ulli provides a rare blend of European sensibility, engineering practicality and American ingenuity to bring a new level of reliability to the often erratic environment of investing. He has applied his intelligence and creativity to refining a dependable method of tracking and working successfully with market trends, and he brings a genuine caring for people to his service as an investment advisor.
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