The U.S. economy should provide stability, but it's going to be a bouncier market.
The good news is the U.S economy should provide fundamental support and stability, but it’s going to be a bouncier market, a little noisier, more turbulent perhaps than we’ve seen in the last couple years, says Dirk Hofschire, senior vice president of Fidelity Asset Allocation Research. He answers two main questions:
We've seen a bit more softening in economic data. Is this a worsening trend?
That is the million-dollar question. Is this the beginning of a new trend or is it a weather-related issue? I think it’s going to come down on the side of this being mostly weather related. There have also been some seasonal adjustments, which makes it hard at this time of year to figure it out. I think the underlying trend is still solid, and one of the reasons is that I don't see any fundamental changes to the midcycle underpinnings that I’ve been talking about for the last several months.
So I’m focusing less on the noisy data that's been moving back and forth the past few weeks, and more on leading economic indicators. The consumer— the biggest driver of the U.S. economy— remains stable. I think one of the reasons is that the employment market is continuing to improve. Payroll numbers have been somewhat disappointing, but leading indicators like consumer confidence in jobs and small-business intentions to hire are still going up, so I think unemployment’s coming down. Put that together with low inflation and real wage growth, and there is a good outlook.
Looking at some sectors like housing and business investment, the numbers have been relatively noisy. But I think the supply-demand fundamentals and housing are still fairly balanced. Business investment profits are strong and there’s less policy and fiscal uncertainty than we've had in years past. Put this all together and I think the U.S. is still in a solid trend. We’re going to see a weaker first quarter as a result of the weather, but it's still a self-sustaining midcycle expansion.
What's your outlook for the stock market the next few months?
As we started the year, my thesis was that it is going to be a more volatile year than last year. In 2013, risk markets—especially in the U.S.—rose fairly steadily without a lot of volatility. We’ve already seen quite a bit of volatility right out of the gates in January. February was somewhat calm, but now Ukraine and Russia are in the news and we’re seeing more volatility again. Volatility is going to be my expectation over the next few months. In part, because we've had several years of asset price increases. There's more good news priced into these markets now than there had been in the past. There are also catalysts from slower liquidity growth out of the Federal Reserve, China's imbalances, and the political risk we’re seeing in Eastern Europe and other places, which have the potential to unsettle markets. The good news is that the U.S. economy hasn't changed and should still provide some fundamental support and some stability for markets, but it’s going to be a bouncier market, a little noisier, more turbulence perhaps than we’ve seen in the past few years.
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