We expect equities to continue to trade sideways as investors await more clarity about the economic outlook. In our view, the first half of the year's weakness was an anomaly, and better growth lies ahead. Global growth is also improving. While risks are inherent, we believe the positives outweigh the negatives. The main wildcard is what will happen when the Fed raises rates, which we think will be more likely in September rather than this week. Having said that, we do not think the backdrop will turn overly punitive for stock prices when this does happen.
Equities have remained remarkably resilient this year, pushing ahead modestly in the face of rising uncertainty. Volatility is likely to remain elevated, and we expect some sort of consolidation or downturn at some point. Over the longer term, however, modestly improving growth, still-accommodative global monetary policy and relatively attractive valuations argue for retaining overweight positions in equities.
As we've previously mentioned, we're overdue for a correction (10% decrease from the closing high). That being said, no one knows when this will transpire. Back in the mid-1990's, the S&P 500 set what was at the time the longest streak without a correction. The S&P 500 continued to amass a 105% gain before a correction finally materialized 45 months later. Our last true correction occurred in 2011. Even if a correction does occur soon, it wouldn't necessarily be a terrible thing for the market. It can provide an entry point to investors stuck on the sidelines and strengthen the market in the longer run.