Though there was quite a bit of back
forth stock market movement last week as investors reacted to
some mixed economic data and earnings reports, stocks ultimately
finished the week little changed.
Like stocks, economic fundamentals are also treading water,
and I see more of the same ahead. As I write in
my new weekly commentary
, I expect a number of key economic and market trends to continue
in the coming months.
January's Consumer Price Index reading
showed that inflation remains well contained. Two factors are
helping to keep inflation contained and less volatile than in the
past - soft wage growth and dampened oil price volatility. If
wage growth stays soft, I don't expect to see any near
term acceleration in inflation.
Low inflation is good news for the economy, and for markets. It
means that the Fed is under no immediate pressure to raise rates,
and we expect short
term rates to remain low for the remainder of 2014 and into
Moderately higher market volatility.
The VIX Index,
a measure of U.S. stock market volatility
, has fallen a bit since it spiked in early February, but it's
higher than it was at the start of the year.
Given the uncertainty surrounding the U.S. economy, the Fed's
the still fragile environment in emerging markets
, I expect the relatively higher levels of equity market
volatility to persist. To be clear, I'm not forecasting unusually
high levels of volatility; rather, I anticipate volatility will
continue to rise from what have been unusually low levels.
Specifically, I expect the VIX to head from its current level of
just under 15 back toward its long
term average of around 20.
More M&A activity.
Corporate deal activity has been on the rise in recent weeks. In
a world of relatively slow growth, and fewer opportunities for
organic growth, it's no surprise that companies are willing to
and in some cases rich stock valuations - to buy growth. The
willingness to engage in mergers and acquisitions may also be a
precursor to rising capital spending.
So what does this mean for investors? Low rates should support
equity valuations and help keep long
term Treasury rates from rising too aggressively. In addition,
higher levels of deal activity and higher capital spending levels
also tend to act as tailwinds for equity markets. You can read
more about my economic outlook in
my latest Investment Directions monthly market
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
and you can find more of his posts
Source: Bloomberg, BlackRock research