A combination of economic growth, low inflation and easy monetary policy in developed economies is currently supporting a range of asset classes, including equities, corporate credit, real assets and government bonds, according to investment strategists at Russell Investments.
The strategists note, however, that this market environment is asymmetrical, as the downside potential outweighs the upside, especially in U.S. equities, where the cyclically adjusted price-to-earnings ratio of the S&P 500 index is near its most expensive level ever except for 1929 and the late 1990s.
They remain underweight U.S. equities and prefer Europe, Japan and emerging markets. They also consider government bonds expensive across regions and expect global yields to trend upward over the coming year.
(Related: New Strategy to Navigate Market Volitility, Sept. 21 webcast with Michael Finke)
"Global growth, inflation and monetary policy have created an economic sweet spot as we look ahead to the fourth quarter of 2017, but we believe high valuations make U.S. equities vulnerable to any news that upsets the industry consensus on moderate growth, low inflation and low interest rates," Russell Investments' global head of investment strategy Andrew Pease said in a statement.
"With the potential for volatility to return, we believe a globally diversified multi-asset investment strategy may offer the best opportunity for both portfolio returns and downside protection."
The strategists caution that U.S. fixed income markets may be underestimating potential upward pressure on interest rates in 2018. Contrary to the industry consensus, Paul Eitelman, a multi-asset investment strategist for North America, thinks the Federal Reserve will remain on hold in December, but expects it to be more aggressive next year.
The strategists also think that U.S. economic fundamentals still look mediocre. They see "secondhand growth" from other economies as likely helping U.S. earnings, which supports shifting equity allocations toward the international markets that have been the engine of growth and trading at more attractive valuations.
