Mardi Gras markets?

Animal spirits rule the markets these days. But does a period of penance await? Heidi discusses.

Laissez les bon temps rouler

The season of Carnival celebrations is upon us, a burst of exuberant revelry, parties and parades, which is then followed by a long period of atonement and penance. As we discuss in the new Investment Directions, our monthly market outlook commentary, investors seem to have taken the dual nature of the season to heart, demonstrating a strong desire to let animal spirits reign—despite a somber realization of the risks ahead.

Second line

Despite an occasional breather, U.S. stocks have continued their upward climb, even after the Dow Jones Industrial Average crossed the 20,000 milestone. The promise of tax reform and other Trump administration policies have continued to fuel strong risk-on sentiment, even though investors acknowledge the impact and timing of those measures is unclear. Meanwhile, the odds of a trade war with one or more trading partners have risen, poorly executed executive orders have been issued, and even a strong, market-friendly tax reform bill will take months to enact, with a long transition likely.

Bead tossing

Nevertheless, we still see the driving force for the markets as reflation: moderately rising economic growth coupled with accelerating inflation driven by expectations of fiscal stimulus. Include strong investor sentiment and it brings to mind “Hey Pocky A-Way,” the classic Mardi Gras song celebrating “feel good music.”

Iko Iko

The reflationary environment suggests both potential winners and losers. Among the potential winners: value equities, which can be helped by gradual increases in interest rates and a steeper yield curve, and small caps, buttressed by higher growth and reduced regulation. The potential losers include Treasuries and bond proxy equities like utilities.

King cake

Still, given the high valuations of U.S. stocks, investors will need to dig deeper to find opportunities in this market. Although there are pockets of value in the United States, investors may want to look overseas in Europe, Japan and select emerging markets in Asia.

Read more in the full Investment Directions report.

Heidi Richardson is Head of Investment Strategy for U.S. iShares and a regular contributor to The Blog.

Investing involves risk, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This post contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

©2017 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.