* Fed rate increase likely in a few months
We expect the Fed to begin raising rates in September, and to move slowly
compared to other tightening cycles. We expect the federal funds rate, now close to
zero, to be 1.5%-1.75% at the end of 2016. Our look at history finds few common
elements in how bonds performed during previous episodes of Fed tightening.
Events unique to the particular period appear to be much more important.
* Stocks can do well when the Fed raises rates
Our US Equity Strategy team concludes that higher rates are not necessarily a
negative for stocks. Years of debt restructuring and a wide gap between current
dividend yields and bond yields suggest that even higher yielding equities may
weather increases in rates better now than in prior tightening cycles.
* Small shift from cash to bonds
We are making a small allocation shift from cash to bonds, after the recent sharp
rise in bond yields. We have not turned bullish on bonds. Even after the change, our
allocation to bonds remains below our benchmark.
* Emerging markets shift from China to India
China has been one of our favorite equity markets and has performed strongly so
far in 2015. We suggest that investors take the price gains as an opportunity to pare
back exposure and re-distribute to India.
* Industrial strength Internet of Things (IoT)
Strategist Matthew Trapp summarizes an in-depth report that analyzes how the IoT
is making industrial companies more competitive, specifically with regard to
industrial automation, the smart factory and the Industrial Internet.
* America’s non-lethal weapon
In our guest column, Commodities Strategist Francisco Blanch discusses the
possible repeal of the ban on crude oil exports from the US. Blanch argues that the
collapse in domestic gasoline and crude oil prices, along with the prospect of lifting
crude oil export sanctions on Iran, increase the likelihood of repeal in the US.