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LETTERMAN TRIBUTE: TOP 10 KEYS FOR STOCKS

This week we pay tribute to David Letterman’s last Late Show with our own top 10 list: the top 10 keys for stocks. A potential snapback in the U.S. economy is the number one issue for the stock market, but here we list nine other issues that will be important in determining where stocks go in the near term.

TAPER TANTRUM REDUX

Unlike the taper tantrum, which was driven by fears over the end of Fed stimulus, the current pullback is being driven by a position imbalance in our view. Lower-rated bond sectors have fared best during the pullback. A lower allocation to bonds overall may still be warranted, given the lack of opportunity and reduced protection offered by still historically low yields and high valuations.

EARNINGS RECAP: GOOD ENOUGH?

The S&P 500 is on track to post year-over-year earnings growth of about 2% in the first quarter — a solid result considering the significant drags from the oil downturn and strong U.S. dollar. Healthcare led the upside, followed by energy, technology, and financials, while industrials struggled.

WATCHING WAGES

While wage growth has been tepid recently, 67 industries have seen wages increase at double the average (21% per annum), with good old American know-how roles well represented. The April employment report suggests wage growth likely remains a concern for Fed policymakers as they debate when to begin raising rates. Our view remains that the Fed may begin to hike rates in late 2015.

EMERGING MARKETS MAY MAKE A GOOD DRAFT PICK TO ADD TO PORTFOLIOS

We believe emerging markets (EM) score well when evaluated along some of the same criteria that NFL football teams use to assess potential draft picks: speed, strength, value, upside potential, and character. According to our evaluation, EM scores very well on the first four metrics, and the fifth — character — is sufficiently discounted in terms of policy and corporate governance risks. EM may make a good draft pick to add to your portfolios.

 
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