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Portfolio > Economy & Markets

Global Realities Won’t Overcome Investor Complacency: Searching for Alpha for October 2014

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A hard landing in China. Higher interest rates. Increasing earnings volatility due to a stronger dollar. Seasonality, Hong Kong, and ISIS.

These are a few of a bear’s favorite things. 

Those realities explain why stocks, bonds, and credit finished in the red last month. But they aren’t any use in understanding why risk assets will end the year at record highs. 

The current bull market has as much to do with sentiment as fundamentals. With the U.S. economy running on all cylinders, investors have more money to put to work. As long as CDs and short-term corporates aren’t cutting the mustard, money will continue to flow into assets that have performed well in the last few years. 

Consider the high yield sell-off in July, for example. The record outflow from junk during the month was quickly reversed as investors ignored lofty valuations in favor of more attractive yields

Don’t get used to these favorable conditions. The continuation of the bull run will only mean that the inevitable correction will be even more dramatic. Diversification and prudence are vital in this part of the economic cycle.

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