Market Week in Review

Global market volatility: Is the post-election rally waning?

Last week, the Dow Jones Industrial Average® crossed 20k. This week, global markets experienced some volatility. Could that be a sign that the post-election rally is waning?

Senior Quantitative Investment Strategy Analyst Kara Ng was joined this week by Sophie Antal Gilbert, program director, advisor insights. Ng stated that yes, the rally could be waning. According to Ng, expensive valuations in U.S. equities make them vulnerable to any potential market shocks—events that could cause prices to stumble.

Ng was quick to comment that Russell Investments strategists are by no means pessimistic. Russell Investments’ modeling shows the U.S. recession probabilities to have fallen over the last few months. But Ng also pointed out that while U.S. equity markets seem to have priced in the “perfect execution of U.S. pro-growth policies,” the implementation of these policies won’t likely happen until the last half of the year and the economic impact could come even later. All this adds up, according to Ng, to the potential for market volatility in the first half of 2017.

How farfetched is a Frexit?

In Europe, Russell Investments strategists are keeping a close eye on the uncertainties surrounding the French election, where the front-runner candidate was recently accused of embezzlement and another French candidate’s platform is based on a French exit from the EU—a Frexit. While we consider a Frexit a low-probability event, we are monitoring it closely.

Eurozone equities scorecard

Russell Investments strategists still believe global growth in general is robust, with each Purchasing Managers’ Index (PMIÒ) for the UK, Europe, and the U.S. all higher in January than their 2016 averages. In particular, Eurozone data has been upbeat, with expectation-beating Q4 GDP numbers. Russell Investments strategists prefer European equities over U.S. equities for two primary reasons:

  1. Their valuations are comparatively better than U.S. equities.
  2. Their business cycle is more supportive, with the combination of a low Euro and an expansionary monetary policy. With the U.S., you have a strong dollar and a tightening monetary policy.

Finally, Ng commented on the U.S. Federal Reserve (Fed) meeting this week. The Fed chose to hold rates steady, which was a surprise to no one. Russell Investments expects two rate hikes this year, with the next one most likely in June.

Watch the video now.

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