The winds of political change—or the doldrums of political and economic uncertainty—should weigh heavily on the minds of market participants over the rest of 2017, says Kristina Hooper, global market strategist at Atlanta-based Invesco.
“The market can be immune to these influences over the short term,” she says. “There are a lot of forces at work to help it along like the synchronized global recovery and accommodative monetary policy, but I believe that over the longer term markets factor in more reality. This is an environment where we want to be aware of our risks, even if they’re not being priced in and most investors are ignoring them.”
Hooper believes that the general upward bias to equity markets should continue, but that risks are growing. As of October 4, major benchmark indexes like the S&P 500, the Dow Jones Industrial Average and the Nasdaq 100 had posted double-digit returns year-to-date, but looming referendums and leadership changes, along with ambiguous policy making, cloud the outlook for the rest of the year.
Even as the bull charges on, Hooper says that the U.S. stock market is flashing some warning signals that disruptions are on the horizon.
“If you just want to follow a reversion to the mean argument, every day without a correction is a day that the risk for a correction increases,” she says. “I would say that the VIX is also a concern, with it being so low, because it doesn’t seem to be accurately reflecting risk.”
To deal with the uncertainties at home and abroad, Hooper recommends that investors seek diversified sources of investment income, embrace international stocks, and hold onto their municipal bond allocations even if they feel compelled to sell due to the potential for tax reforms.
Hooper recently discussed six trends she believes would dominate market discussions in this year's fourth quarter.
No. 1 – Threading The Needle With Interest Rates
Hooper expects that most of the developed world’s central banks will continue on a path of gradual normalization, led by the U.S. and Canada. The Bank of England also appears prepared to begin tightening it’s monetary policy once more, even as the official date for its exit from the European Union looms.
“Ten years ago, monetary policy was seen as accommodative because interest rates were poised to go lower,” she says. “Today, they’re poised to go higher, even if it’s not much higher. Central banks won’t fully normalize in the near term, and it may be that interest rates are never really normalized, but investors should remember that ten years ago, even with accommodative monetary policy, the financial crisis led the U.S. into a recession.”