Get ready for a potentially tumultuous fourth quarter buffeted by political and economic events here and abroad.

“The fourth quarter of 2016 could be challenging as markets navigate the U.S. election, Italian referendum and likely December rate rise,” according to Russell Investments’ “2016 Global Market Outlook – Q4 Update.”

The U.S. presidential election is Nov. 8; OPEC will hold a production meeting in November where oil ministers could agree to expected production cuts; and the Italian referendum to reform its constitution is Dec. 4. The referendum is an effort to make Italy a more governable country—it’s had 63 governments in 70 years—by curbing the power of its Senate and strengthening the power of its Prime Minister, who would serve a five-year term as head of the party with a majority in parliament.

“The U.S. presidential election has the potential to deliver a market shock” if Donald Trump wins because of the “implications for geopolitical stability,” according to the Russell Investments report. In Italy, a “no” vote on the referendum could force Prime Minister Matteo Renzi to resign, fueling fears about stability there and about the euro.

Despite those possibilities, Paul Eitelman, investment strategist, North America at Russell Investments, tells ThinkAdvisor that he’s not too worried about the U.S. election, even if it could spike volatility in the short term. What’s more important for markets, said Eitelman, are the economic fundamentals and Fed policy.

He recommends investors be “risk managers rather than risk takers” in the fourth quarter and in 2017.

Russell Investments expects the Fed will likely hike rates at its December policy meeting and then twice again in 2017 if the economy maintains its modest growth trajectory and inflation firms gradually. While the U.S. Fed is expected to raise rates, the European Central Bank, Bank of Japan and Bank of England will be considering further easing, maintaining the divergence in global central bank policy that has been informing global financial markets, according to Russell Investments.

The global asset manager expects the U.S. economy will grow about 2% next year and 10-year Treasury yields will rise to 2% in the next 12 months (the 10-year note ended Friday at 1.6%).

Despite the resilience of the U.S. economy and still relatively low rates, Russell Investments is not keen on owning U.S. stocks and prefers instead European, Asian and emerging market equities. 

U.S. stocks are simply too expensive, said Eitelman, with a forward price earnings multiple of the S&P 500 is 17 times—above the five- and 10-year averages. “Profit margins are already at high levels, cost pressures are starting to build, due to rising wages, the economy is at full employment and recession risks are pretty modest.”

In addition, said Eitelman, U.S. earnings are “a really big question mark,” having fallen 3% in the second quarter and seen as flat in the third quarter (FactSet is forecasting a 2% decline for third quarter earnings).

In contrast, stocks of companies based on the European continent and in Japan are slightly cheap and emerging market stocks moderately cheap, according to Russell Investments. European stocks are supported by improving earnings while emerging markets are “starting to become a bit more competitive as export growth is starting to turn,” said Eitelman.

He also likes emerging market debt, denominated in local currencies, because of exchange rates with the U.S. dollar as well as U.S. high yield bonds, which can provide “significant benefit” during market downturns.

Overall, the current market is a “difficult environment with lackluster global growth and expensive U.S. equities and bonds,” says Eitelman. “Investors needs to expect lower returns on a forward-looking basis.”

He recommends investors “allocate globally where returns are high” and “buy on significant dips and sell into significant rallies.”

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