Investors would do well to look through short-term risks, particularly political, and focus on the long-term drivers of return. If anything, the events of the past 12 months reinforce that view. Despite seemingly relentless political stressors, global economic and stock market fundamentals have not been dramatically affected.
Reflation is alive and well, and encouraging economic stability across the world. Our BlackRock GPS, which tracks the global economy, suggests we have entered a period of sustained above-trend growth. The current economic cycle, while unusually long and slow, appears to have ample runway. Our analysis suggests its remaining lifespan can likely be measured in years, not quarters.
The corporate earnings picture is brightening globally. Whereas share buybacks and cost-cutting helped propel bottom-line growth in recent years, first-quarter sales growth in the U.S. appeared the strongest in more than five years. Solid earnings and improving revenues — particularly among cyclical companies — are supportive of global growth.
Equity valuations should find support in sustained economic expansion and in low real bond yields globally. In an environment where government bonds face a less accommodative monetary regime and a macro shift toward higher yields, we believe investors are being compensated to take risk in stocks.
Markets will always provide reasons for worry. Indeed, the sharp fall in Brazilian assets last month as political uncertainty erupted provided a timely reminder that investors must not be complacent about the potential for spikes in volatility and drawdowns. But it is important to remember that periods of short-term market volatility are the norm, even in an economic expansion. We see no immediate red flags to suggest impending sustained market dislocation.
Low volatility readings of late have stoked speculation of an inevitable mean reversion. Whereas high readings on Wall Street's fear gauge, the VIX, have been reliable buy signals, the opposite is not the case. Low volatility historically says little about the direction of future equity returns.
Ultimately, timing markets is hard — and avoiding them costly. Most investors would do well to focus on the long term. Seeing the forest through the trees can pay its own dividends.
Commentary by Richard Turnill, global chief investment strategist at BlackRock.
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