On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Sam Templeton, manager, global communications, discussed recent stock market performance, the impact of plunging currencies in Turkey and Argentina on emerging markets, and the recently released minutes from the U.S. Federal Reserve's (the Fed) meeting earlier this month.
What could drive equities through year's end?
In general, the stock market has been in a trading range for the past several weeks, Ristuben said - and he foresees this to continue for some time. "At Russell Investments, we expect moderate returns for the remainder of 2018 across equity markets - potentially in the mid-single digits, and probably a bit lower in the U.S.," he stated. Why? In Ristuben's mind, it all boils down to stock valuations versus economic growth and earnings results. While economic growth has remained fairly robust so far this year - and first-quarter earnings results came in quite strong across most of the globe - stocks are still very expensive, particularly in the U.S., he explained.
The result of late? Another mostly flat week for U.S. equities, with the S&P 500® Index up a little less than 0.5% the week of May 21 compared to the week before, Ristuben said. "Ultimately, some of the performance in the stock market this week suggests that equities continue to be bound by a tug-of-war between solid economic growth and high valuations," he remarked.
Emerging markets on edge after currency woes in Argentina and Turkey
Turning to emerging markets, Ristuben said that both Argentina and Turkey have experienced significant drops in the value of their currencies, the peso and the lira, respectively. This has led some investors to ponder if an emerging markets crisis could be in the works - but Ristuben and the team of Russell Investments strategists believe that's unlikely to be the case.
"We see the challenges in Argentina as more along the lines of growing pain challenges, whereas in Turkey, it's more centered around a lack of response on the interest rate side to dealing with high inflation," he said - "but more importantly, we see both of these as isolated issues within the broader emerging markets sector." Ristuben added that the two countries make up a small segment of the market capitalization of emerging market indexes. On the other side of the ledger, Asian countries - which comprise the largest chunk of market capitalization - have been experiencing solid economic growth, he noted.
The takeaway? "At Russell Investments, we still see opportunity in the emerging markets sector," Ristuben said.
What do the latest Fed meeting minutes reveal?
Minutes from the Fed's meeting earlier this month were released May 23, Ristuben said - with the central bank appearing to indicate a level of comfort in the short-term should inflation rise above its 2% goal. "It seems that the Fed wants to make sure markets understand that its policy response, should inflation climb modestly above 2%, or remain slightly below, is going to be the same regardless," he explained.
In Ristuben's view, this may serve to help placate investors, some of whom have grown concerned that the Fed could become more active in regards to rate hikes if inflation tops 2%. Following the release of the minutes, the probability of a fourth interest rate increase this year - as measured by CME's FedWatch tool - moved down below 50%, he noted.
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