Russell Investments Managing Director Timothy Noonan say this is a critical moment for both investors and advisors.
The concerns of Russell’s global strategists earlier this year–Eurozone instability, the fiscal cliff and sequestration–have proven less significant than expected, they explained in a report released on Tuesday.
Instead, the key themes of today’s markets are stable economic growth in the U.S., continued growth in China, and Japan’s successful stimulus program–which have all helped the U.S. equity market achieve its best first quarter since 1997, they point out.
Noonan and his colleagues say that many U.S. investors have shifted from a “glass half-empty” to “glass half-full” mentality when it comes to stock markets.
That begs the question: How should they position their portfolios for the rest of 2013?
Overall, the Russell investment team has these three strategies:
- For clients who bailed out of the markets: Cash is a “lesser opportunity;” advisors should discuss the fact that waiting for a future “correction” can be a riskier stance than holding a diversified, multi-asset portfolio.
- For clients in the market: Advisors may want to encourage them to stay in and not “flinch” at concerns over a correction; corrections have historically been paired with strong returns for the year overall, Noonan says.
- For clients making large contributions to savings: Some may want to try timing equity investments after a market pullback; Russell experts, though, suggest advisors speak with such investors about taking the steadier approach of dollar cost averaging through short-term ups and downs.
Just how well have the markets done?
U.S. equity values rose by more than 10% in the first quarter, the Russell team says. The Russell 3000 Index, for instance, was up 11% in Q1’13, while the Russell Japan Index was up 12%.
“Moderate—but stable—economic growth, buoyed in the U.S. by resurgence in the housing and energy sectors, proved more influential than short-term consternation over political stalemates, potential long-term costs of government stimulus and lingering questions about the longer-range remedy for “federalizing” Europe. Equivalently, Asia proved the skeptics wrong,” the Russell strategist team wrote in its Q1 analysis.
And where are the markets going? “The intersection of improving economic strength and decreasing investor anxiety, we think, may yet push equity values further in 2013,” Noonan said. While the potential for equity market drawdowns in any given year is significant—the average annual pullback on the Russell 1000 Index (peak to trough) from 1980 to 2012 has been 14.5%—Russell’s strategists believe that the equity market has potential for continuing its overall upward trend.”
Plus, they add, the equity markets still have plenty of room to grow.
Given current market levels, many investment strategists are suggesting that equities are more attractive than fixed income,” the Russell group pointed out, adding that “current stock valuations are not far above historical averages.”
According to Andrew Pease, Russell’s global head of investment strategy at Russell, investors can expect “positive gains likely limited by a mature earnings cycle, reasonably full valuations and moderate economic growth.”
Russell experts also say that we are not in a bond-market bubble, and that interest rates will go up eventually—most likely in 2014.
Still, for those who are highly concerned about interest-rate increases, the strategists suggest the following:
- Decrease duration, since the prices of bonds with shorter durations don’t decline as much as longer-term bonds when interest rates rise.
- Adjust credit exposure, given the fact that investing in bonds with higher yields and higher risks means portfolios earn more income, which adds to a bond’s total return; this may help offset any price declines resulting from interest-rate increases.
- Make modest increases of allocations to higher-credit-risk sectors “to take advantage of higher-return opportunities without undermining the diversification benefits of bonds.”
- Increase country and currency exposure, which can help diversify a portfolio against some effects of rising U.S. interest rates.
Read Advisors Optimistic, Not Using Policy Statements: Russell Outlook on AdvisorOne.