The Fed is taking the training wheels off the economic cycle and the market is responding nervously. Any new hurdle to sustainable global growth seems to be interpreted as an unsurmountable obstacle. The standoff with Russia, ISIS, Ebola, a rising greenback, falling oil prices, faltering Chinese and European growth, rate hikes versus deflation and high yield liquidity risk are all impediments.

However, the Fed has displayed growing confidence that the last mile of recovery can be ridden without additional quantitative easing. Rate hikes are on the horizon. Looking at the broader picture, the US economy does not seem too far away from being back on track. The rest of the world is taking action in an effort to follow suit.

While the Fed has reduced its asset-buying program, we think it is unlikely to reduce its balance sheet anytime soon. Simultaneously the European Central Bank is planning on expanding its balance sheet back to 2012 levels. More recently, the Bank of Japan surprised financial markets by accelerating its already substantial quantitative easing program. We can draw the conclusion that liquidity should remain plentiful in the foreseeable future.

So why worry? It’s all about confidence. Actions speak louder than words, and central banks in Europe, Japan and China are under pressure to deliver. The same is true for European and Japanese governments when it comes to pushing reforms through.

In parallel, a stronger greenback could have positive repercussions. Part of the current deflationary shock would be transferred to the US market and growth would be stimulated where needed, helping both European and Japanese economies. We believe that such a move in the dollar, unless it happens too fast, can be digested by a robust US economy that would in turn see the situation of its trading partners improve.

Nevertheless, the list of potential hurdles ahead of us may look bleak and the end of the story has yet to be written. Just like a young child on its bicycle, markets will likely need to be constantly reassured by central banks and corporations. Going forward, the market environment may be marked by increasing uncertainty and an increasingly volatile relationship between stocks and bonds.

If we return to the training wheel analogy, the path ahead will likely be rockier than before.  In such an environment, traditional asset allocation approaches have been called into question. Further, the negative impact of rising rates may limit the diversification power of bonds within a portfolio.

A method to overcome these hurdles may be to adopt a flexible approach to weathering short-term volatility by adjusting capital allocation dynamically over time while resorting to a broad multi-asset investment universe. These types of strategies are commonly referred to as global tactical asset allocation. However, such approaches tend to benefit most when economic and financial visibility is high and allocation decisions among asset classes can be made effectively.

Another option could be to expand the opportunity set. Equity volatility represents an investible asset class which is geared toward turning uncertainty into a source of opportunity.

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