Quarterly market outlooks: Fireworks, flares or crystal balls?

Every day we hear news that could affect our investments. And with the advent of smartphones, the frequency of this news is compressed to hours and minutes.

So, why would a quarterly market outlook, similar to Russell Investments Q4 Update, be any use? Isn’t this just a flash of light and a loud noise to help us impress our friends?

Surely, any information would be out of date by the time you read the report, and any potential advantage would be arbitraged away by the professionals that use such information in real time to manage money?

Yes, if you are trying to use the report to make short-term tactical asset allocation decisions to add value. However, such a report is useful in other ways.

Providing a context to any news
With access to so much information, it’s easy to over-react to negative market events. The views contained in such reports can help you put any news in a wider context and ultimately help you build a view on the likely impact on your portfolio.

Recent events that are keeping me up at night are:

  • Do the sharp equity falls in August signal a bear market?
  • What is the impact of China on global markets?
  • Is Greece and the Eurozone in trouble?

The work from Russell Investments strategist team – the guys that are paid to look at the markets day in and day out – has helped me put these concerns into context. They believe that the:

  • Market turbulence is simply a retreat from overbought conditions and that we are at an inflection point, not the beginning of a bear market.
  • Chinese economy is decelerating but not collapsing. While they remain wary of China and its bearing on emerging markets, they believe the impact on developed economies will be contained.
  • Pronouncements of the eurozone’s demise have once again turned out to be greatly exaggerated. The Greek crisis has come and gone and the economic recovery has barely lost momentum.

Providing a flare to guide you
The key to translating disparate events into an implementable signal is to use a consistent framework to give an objective scoring system on which to base investment views. Our strategists use a process which centres on an evaluation of the business cycle, market sentiment, and market valuations (Cycle, Sentiment and Valuation – CSV) to gauge the impact on a ‘model portfolio’. This approach avoids a single metric, such as valuation, distorting their views. Examples of signals derived from looking through a CSV lens include:

  • The strategists’ medium-term outlook for the U.S. and global economy is still positive and we believe global equities should deliver moderate returns.
  • Their most preferred equity market is Europe, followed by Japan, and remain cautious of the U.S., U.K and emerging markets.
  • They have a favourable outlook on the U.S. dollar and Sterling

Beware crystal-ball gazing
The signals from any quarterly outlook give you a direction of travel, they will not be perfect predictors of the future. Therefore, while I personally would not use them to tactically time the markets in the short term, I would use them as a guide when looking at entry and exit points, for example deciding on whether to continue with or temporarily defer any switch between asset classes.

Click here to view Russell’s 4Q outlook.