Crosscurrents bound to create bouts of volatility but also generate investment opportunities across markets
Investors should not see today's broad stock market as a bubble but rather as a mature bull market, says David L. Donabedian, CFA, Chief Investment Officer of Atlantic Trust, the U.S. private wealth management division of CIBC (NYSE: CM) (TSX: CM).
"By virtue of its duration and current valuations, equities are in the mature phase of a bull market. That means a more sober pace of advance, with a lot riding on the economy and monetary policy," says Donabedian.
"Many have asked the question, 'Are we in another bubble?'" he says. "Our response is no, but given the destruction over the last 15 years from the bursting of the tech, credit and housing bubbles, this question is always a wise one to ask."
Stoked by unconventional monetary stimulus and with evident pockets of valuation excess, the S&P 500 reached progressive new highs. But, overall market valuations are middling relative to the long-term average, and interest rates remain well below average.
"Excessive valuations and 'hot' IPOs in the social media and biotech spaces have been deflated, while the overall market advanced. This is an indication of rational, valuation-sensitive behavior—not a bubble," he says.
The good news is the U.S. economy continues to gain strength. "It has been a long time coming, but the U.S. economy is showing its broadest base of health in almost a decade," says Donabedian. "We look for 3% or better real GDP growth over the next few quarters—about a full percentage point higher than the average growth rate of this recovery."
There is no question that the extraordinary measures of the Fed and other central banks have been a huge catalyst for the equity bull market in recent years, he says.
In the near term, the European Central Bank's more aggressive approach is supportive of equity markets around the world, not just in Europe. "Liquidity is increasingly a global phenomenon," he adds. "Over time, though, we expect that central bank policy will be the most frequent source of market volatility."
www.atlantictrust.com
