Q4 Outlook: LPL Strategist Says First Week of November Is Crucial

Levine agreed, saying that investors have been so afraid of the stock market and have put so much money into bonds and bond funds that they have driven yields down to “extraordinarily low” levels.

“As a result, short-term bonds are perhaps safe, but returns are paltry,” Levine said. “As for long-term bonds, our team believes that they carry a great deal of risk that some people are not recognizing, and that the value of long-term bonds will drop sharply when interest rates start to move higher, which we are expecting, though maybe not in the next couple of months. I think that interest rates will head higher and the value of long-term bonds will come down rather sharply.”

For clients who want to own bonds, the Neuberger Berman managers are encouraging them to stay on the short end of the maturity spectrum, recognizing that the returns aren’t great, “but at least there’s a safety factor there,” Levine said. “We’re shying away from long-term bonds. A lot of investors are looking for yield as the Baby Boom generation is entering the retirement stage, and we think the yields on some stocks are a lot more attractive than yields in the bond market.”

In fact, Pomeroy added, “We think [daily economic data] is a lot of noise that professional investors and media people latch onto. The bigger picture is that there is tremendous value in equities right now, and there’s an opportunity for investors to think about their asset allocation. We would advise people to review their asset allocation in the fourth quarter and think about dollar-cost averaging into the equity market, particularly something like an equity income product, which gives a higher current yield than the bond market and offers equity participation, but historically with half the volatility of the S&P 500.”

More of the Same, but No Double-Dip Recession Expected

Meanwhile, Steve Blitz, senior economist with New York-based Majestic Research, said that the U.S. will most likely see “more of the same” in the fourth quarter, noting that the latest economic reports have been lackluster.

“These are not good numbers getting the economy back to trend,” Blitz said. “You will have some weakening in the business sector in the fourth quarter offset by a reduced pace of imports.

Meanwhile, Robert Dye, senior economist for PNC Financial Services, Pittsburgh, forecasts moderately increasing economic momentum visible in the upcoming fourth quarter.

“PNC economists are not among the ‘double dippers,’” Dye said in an analyst note last Friday. “The soft patch of Q2 and Q3 is ending, but the recovery remains at half-speed.”

Similarly, Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, Shrewsbury, New Jersey, said he expects the FOMC to engage in another round of quantitative easing when it meets in November.

“They’re going to act quickly if things get worse,” Roberts said. “Gold and bonds say the FOMC is going to continue easing.”

Ahead of the midterm elections in November, investors should expect the government to do what it can to create a protectionist export economy, Roberts added.

“I think you’re going to see some volatility going up to the election,” he said. “We’re trading in a broad range, with the S&P 500 trading around 1010.”