Russell’s updated 2013 outlook: From glass half-empty to glass half-full?
Many of the concerns that moderated the Russell global strategist team’s expectations going into 2013 didn’t come to pass in the first quarter of 2013. Instead, the U.S. equity market had its best start to the year since 19971 – barreling through the team’s equity market targets for 2013 within a matter of weeks. The team has recently released their first quarter updated outlook, a summary of which follows below.
The team’s most prominent concerns at the end of 2012 were over European Union instability and the potentially destabilizing “event” of the U.S. fiscal cliff and sequester. As it turned out, that destabilization never came. Moderate – but stable – economic growth, buoyed in the U.S. by resurgence in the housing and energy sectors, proved more influential than short-term consternation over political stalemates, potential long-term costs of government stimulus and lingering questions about the longer-range remedy for “federalizing” Europe. Similarly, Asia proved the skeptics wrong: the Chinese government continued to demonstrate its ability to transition political power and manage moderating economic growth; the Japanese equity market responded decisively to the transition to the Abe government and its stimulus platform.2
One could say that market psychology shifted from “glass half-empty” to “glass half-full” – perhaps partly as a reflection of investor fatigue over consecutive politically-oriented (often self-inflicted) wounds. In line with this, Russell’s strategist team’s 12-month outlook is positive but with gains likely limited by a mature earnings cycle, reasonably full valuations and moderate economic growth. In their view, issues in Europe are far from resolved and are likely to remain a source of volatility.
Russell’s current outlook for the remainder of 2013
Updated at the end of the first quarter
U.S.: real GDP growth 2.0%; nominal GDP growth 3.8%; inflation (based on all-items consumer price index) 2.1%; non-farm payroll employment gains 170,000 jobs/month on average
Europe: worrying in terms of both the level of growth and its dispersion across the Eurozone. Germany is still relatively strong whereas the Southern European countries are suffering. Overall, our forecast is around -0.5%.
Equity market returns:
U.S. equities: a nominal GDP growth of 3.8% in 2013 is okay, but not the foundation for sustained double-digit equity market returns
European equities: remains a high-risk, but interesting place for investors with a commensurate risk tolerance
Emerging market equities: though potentially more risky than developed markets, emerging market equities appear to have valuation upside potential and may be a value play among global equity markets
Bond market returns:
U.S.: 10-year Treasury yield projected at 2.25% by year-end, assuming the economy neither overheats nor undershoots toward recession
Global sovereign bonds: still expensive, but yields likely to rise only modestly
Where does this leave investors in 2013?
Overall, for the diversified investor, I’d say: if you haven’t flinched yet, don’t flinch now!
- For clients who have bailed out and now fear “missing the party” by staying in cash or short-term bonds, we continue to see cash as a lesser opportunity. In our view, a decision to await the uncertain event of a future “correction” as a cue to “bail back in” to equity the market is a riskier stance than holding a diversified portfolio.
- For clients who are in the market, we encourage them to consider staying in. Concerns that there may be a stock market correction sometime this year may or may not be correct. Two, things, however, argue for maintaining position: corrections have historically been paired with strong returns for the year overall. Second, moving an entire portfolio to cash is to forego potential return opportunities in other assets.
- For clients who are making large contributions to savings, we suggest dollar cost averaging3 through the short-term ups and downs. It’s certainly not as exciting as calling the market’s peaks and troughs – but it is more likely to deliver a satisfactory outcome in the long run.
1 U.S. equities represented by Russell 1000® Index, which was up 11% in 1Q13.
2 The Russell Japan Index was up 12% in 1Q13.
3 Dollar cost averaging does not assure a profit or prevent a loss in declining markets, and you should consider your ability to continue investing during low price levels.
The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
Diversification, strategic asset allocation and multi-asset investing do not assure profit or protect against loss in declining markets.
Forecasting is inherently uncertain and may be incorrect. It is not representative of a projection of the stock market, or of any specific investment.
Investments in global equity may be may be significantly affected by political or economic conditions and regulatory requirements in a particular country. International markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation. Emerging or developing markets involve exposure to economic structures that are generally less diverse and mature. Such securities may be less liquid and more volatile.
Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
Series: Russell strategists' outlook