Bruce Bittles, chief investment strategist and William Delwiche, investment strategist at Milwaukee-based Robert W. Baird & Co. Inc., are urging caution among investors for the second half of the year.
Their mid-year update on the 2014 Economic and Stock Market Outlook has changed from a mildly bullish reading in January to concern regarding extreme optimism surrounding several economic gauges.
While there has been a “modest improvement in market breadth,” and that trend could lead to a continuation of the cyclical rally, it is also highly possible that geopolitical tensions will slow economic growth, the report said.
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Among their economic thoughts:
- The gross domestic product contracted in the first quarter, though real final sales of domestic product grew.
- A slow improvement in the employment-population ratio is encouraging for the labor market.
- The number of industries seeing employment gains is trending higher.
- The rise in commodity prices suggests better growth, and for some, higher inflation.
- Without better wage growth, inflation concerns are likely overblown.
- Expectations for an economic bounce are high—this could limit upside surprises.
- The policy environment is improving, but is still a net drag on the economy.
- Policymakers need to be proactive as recent gains are on course to reverse.
- Fed talk has turned from taper pacing to the timing of rate hikes, still a year out.
- Bond yields appear about right given the current macro backdrop.
- Stocks remain overvalued—by about 30% based on this comprehensive look.
- The economic optimism missing at the beginning of 2014 has begun to build.
- Bond sentiment has moved from excessive pessimism to widespread optimism.
- A lack of liquidity could exacerbate any selling that does emerge in 2014.
- Allocations to stocks remain high and allocations to cash are well below average.
- Sell in May was a no show, but the pattern says look for weakness into mid-terms.
To view the report and graphs, click here.
