• Wealth Management

3 Market Signals to Watch

Investors should keep an eye on inflation, the dollar and capital spending to discern whether the next move in markets is up or down.

As we near the end of a strong first quarter for stocks and bonds, rather than bet on the gains continuing, I suggest investors remain cautious.

As I wrote recently, there are risks that could surface and cause investors to sell stocks, which are at high valuations even as earnings growth cools.

Now I want to highlight three key market indicators that could give us early insight into what’s coming next for the market:

Inflation: While investors don’t see inflation as a threat (higher bond prices and lower yields are exemplary of this), the labor market remains tight, driving wages higher. Oil prices are rising and import and export prices are higher, reflecting the impact of tariffs. The bond market is not priced for an inflation rebound, which isn’t out of the question. If that happens, interest rates could rise and bond prices (which move inversely to rates), would fall.

U.S. Dollar: The dollar is up 8% against a basket of foreign currencies from a year ago, which I think leaves it in a somewhat precarious position. While currency weakness in Europe and Britain lead to dollar strength, easier monetary policy being implemented by the Federal Reserve adds more dollars to global markets, which could cause the dollar to weaken. That could provide a tailwind for non-U.S. stocks.

Global Capital Spending: The strength of corporate spending around the world is also unclear. While U.S. durable goods orders suggest a rebound in January, CEO confidence has declined in recent quarters as uncertainty around trade policy and the economic outlook linger. CEO confidence is a key indicator of capital spending growth.

As happens periodically, there are many economic crosscurrents rendering the future direction of markets particularly unclear. My advice is to resist the urge to make a sizable new allocation to U.S. stocks or bonds right now, but to stay broadly diversified, including a healthy allocation to non-U.S. markets. If you have experienced some strong gains in riskier U.S. stocks and corporate bonds, taking profits and rebalancing your portfolio so that it is in line with your strategic asset allocation plan is likely a prudent course of action until the next major move in markets reveals itself.

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