Over the past few months, I have been asked many times how to factor the news cycle and developments in Washington into market expectations. My view on this has not changed with the events of the last few weeks. If you are a long-term investor, you have to look past the short-term noise that is the news – be it political or financial – and stay focused on the primary drivers of the market, including valuation, economic growth, monetary policy and regulation. If you are a trader, you need to be more aware of the noise, but recognize it can be extremely difficult to predict. As a result, I have always tried to discount news items or reduce my trading in times of significant event risk.
In the next few months, I continue to be focused on an improving economy, pro-growth deregulation and tax policies as the primary support for the stock market. I am cautious about monetary policy tightening and geopolitical uncertainty. I still think the positives outweigh the negatives in this environment, and despite less attractive valuation, U.S. equities remain reasonable given the low level of interest rates and expected corporate earnings. I continue to be bearish on bonds because of the unknown impacts of unwinding quantitative easing and the potential for significantly increasing deficits.
In the week ahead, I will be watching the Federal Reserve (Fed) minutes for insight on the tapering of the Fed's balance sheet. I will also be paying attention to oil prices, which have rebounded over the last few weeks. This week’s OPEC meeting should extend production cuts and keep prices above $50/barrel.
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