Markets retreated this week on concerns about slower global economic growth and on the potential for U.S. monetary policy changes after the newly released Fed minutes. Since the broader averages were up nicely year to date (before the pullback, the S&P 500 was up 6.7%, the Dow Jones Industrial Average was up 7%, and the Nasdaq was up 5.6%), it is not surprising that investors took profits, especially in the cyclically sensitive names, such as miners, industrials and financials, which have been the outperforming groups year to date.
We expect the volatility to increase over the near term because of the Italian elections this weekend, the sequestration deadline and the upcoming speech from Fed Chairman Bernanke.
But we remain constructive on the markets for the long term, and we see many of our 2013 themes well intact and view the pullback as an opportunity. Interest rates will remain low for some time (Fed Governor James B. Bullard reiterated this on Friday on CNBC), earnings will continue to mend (fourth- quarter earnings growth of 7.2% was ahead of the expectation), and U.S. corporate balance sheets are very strong (and companies are returning cash to shareholders). Valuations remain attractive as well. And if commodities continue to correct, this will help consumers’ and U.S. corporations’ raw-material costs.