Spring training

Heidi discusses whether optimism or sober assessment of valuations and political realities can prevail in the markets.

Play ball!

Spring training is underway, bringing baseball players back for another season. It is a time of unbridled confidence, when every team imagines it will win the World Series, and every player will have a record-breaking year. As a Red Sox fan, I’m particularly excited for the prospects for my team this year. Of course, few of these predictions come true and only one team wins. But as we discuss in the March Investment Directions, our monthly market outlook commentary, investors appear to have a similar optimism these days, even with a slight pause in the rally in recent days. But just as even the greatest players can stumble, political realities and stretched valuations could well disrupt the market rally.

Knuckleball

For years, investors often took their cues by analyzing the nuances of Federal Reserve statements. Now, the focus has increasingly moved to parsing the ups and downs of the new administration. For example, equities rallied strongly after President Trump’s acclaimed address before both houses of Congress in late February, but stumbled after questions surrounding Attorney General Jeff Sessions broke the next day.

Hit and run

Certainly, the potential Trump administration policies represent an important shift in market sentiment and expectations. But it is important to note that signs of rising economic growth coupled with accelerating inflation—so-called reflation—actually predate President Trump’s election. Economic data already show an improving economic picture, before the new administration’s policies have even been enacted. In short, we still see reflation as the driving force for the market whether it gets a “steroid boost” from new policies or not.

Small ball strategies

U.S. stocks are not cheap, but there are pockets worth considering, such as financials and value. We still prefer stocks over bonds, and within stocks are looking overseas in Europe, Japan and emerging markets, particularly in Asia. Still, investors may need to play a game of “small ball”—by focusing on grinding out runs through singles and moving the runner forward, rather than hoping for the home run and striking out.

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.

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