Last week, U.S. investors brushed off geopolitical worries, pushing stocks to a record high. But it’s a mistake to attribute the rally solely to economic strength.
Despite some better-than-expected headline economic numbers, data have actually been mixed. For instance, while there was a big February bounce in a key manufacturing gauge, an important measure of the service sector sank to a four-year low in February.
Meanwhile though job growth rebounded in February, other metrics – including a still-low labor force participation rate and high long-term unemployment – reaffirm that the U.S. labor market is still struggling with structural challenges.
For now, however, as I write in my new weekly commentary, the “good enough” economic data, momentum and low rates are allowing the bull market to enter a sixth year. On March 9, 2009, the stock market bottomed amid the throes of the financial crisis, and the next day marked the start of an upturn.
So what does this mean for investors? I believe there are two strong arguments for sticking with stocks, which I believe can move higher in 2014.
- Relative valuations. While stocks are no longer cheap, equities still look like a more attractive option than cash or bonds. Cash investments are effectively paying nothing, and traditional areas of the bond market offer little return on a post-inflation, post-tax basis.
- The macro environment. I expect continued low inflation and low rates as well as a gradually improving economy, an economic environment that is supportive of stocks.
Still, while I expect the bull market to last for a sixth year, I do foresee more modest U.S. market gains and more market volatility in coming months, given ongoing geopolitical turmoil, Fed tapering and the still-fragile environment in emerging markets.
In addition, if U.S. economic data doesn’t improve in coming months or if the geopolitical situation worsens, stocks and other risky assets may become more vulnerable.
But for now, even after a five-year bull market and prospects for more volatility ahead, I would encourage investors to maintain their emphasis on stocks.
Source: Bloomberg, BlackRock research