Fed Action Could Spur Market Volatility

Markets get nervous during periods of transition, and the normalization of interest rates will be a “rocky road,” said Quincy Krosby, chief market strategist for Prudential Annuities, during the Prudential 2013 Midyear Global Markets & Economic Outlook briefing in New York City.

John Praveen, chief investment strategist for Prudential International Investments Advisers, is also optimistic about the market recovery, but agrees that volatility will be a factor until there is more certainty about the Federal Reserve’s interest rate and liquidity strategy. “Right now, we are in very choppy waters. … In the near term, we are probably going to see markets struggling,” he said.

For the remainder of 2013, Praveen said, global equity markets are supported by a number of positives, including low interest rates and plentiful liquidity; strengthening global growth and benign inflation; improving risk appetite as the Eurozone continues to re-stabilize; a healthy earnings rebound and attractive valuations.

Michael Lillard, chief investment officer of Prudential Fixed Income, views the recent turbulence in the fixed-income markets as an overreaction to the Federal Reserve’s plan to begin “tapering” its quantitative easing program later this year, provided unemployment continues to trend lower.

“In particular, the sell-off in the credit-related sectors was fueled by a shift in market technicals, not fundamentals, resulting in market dislocations that have created long-term value opportunities,” Lillard said. “We expect interest rates to remain relatively low from a historical perspective, and while they may drift somewhat higher over time, the extreme volatility that we’ve witnessed recently is unlikely to persist.”

After struggling at about 2% growth for the past few years, by late 2014 the U.S. should start to experience quarters with real GDP growth of 5% or more, predicted Ed Keon, managing director of Quantitative Management Associates, during the Prudential 2013 Midyear Global Markets & Economic Outlook briefing in New York City.

The housing market, labor market and access to credit will all add to growth, he said. Keon joked that he has “insane optimism,” but is hopeful that the economy will prosper. “Ultimately, we offer an optimistic view of the economy, and suggest that the recovery is real and likely to gain strength over the next couple of years,” he said.