April 22, 2013

John D. Linehan John D. Linehan, Head of the U.S. Equity Division

In the first quarter of 2013, the U.S. stock market saw many indexes hit all-time highs despite lingering domestic and global concerns. John Linehan, T. Rowe Price's director of U.S. Equity and the manager of the U.S. Large-Cap Value Equity Strategy, discusses the dramatic market recovery, where we are now, and what to look for moving forward.

Factors Driving U.S. Equity Performance

Renewed confidence in the U.S. economy has been a driving force behind the market's recovery. Coming out of the recession, investors were very wary about the economy's prospects but now are more positive about the outlook in general and, specifically, about the country's improving manufacturing competitiveness.

For investors, valuations are reasonable, and low yields in the fixed income market make equities look more attractive by comparison. Corporate balance sheets are also healthy. Finally, Linehan notes that there is a lot of cash on the sidelines. Investors who have pulled money out of equities are showing signs that they are now comfortable enough to begin reinvesting.

Key Trends: Shifting Emerging Markets, Active Central Banks

Emerging markets have experienced rapid growth over the last decade, but a trend toward higher inflation has slowed these economies more recently. As countries such as China begin to shift focus away from ramping up infrastructure and growing exports, they are increasingly oriented toward consumer spending and domestic consumption, which will eventually create intriguing new global opportunities.

In the U.S., Europe, and large emerging markets like China, India, and Brazil, aggressive monetary easing by central banks has successfully battled inflation and pumped liquidity into the system. This has been a benefit, but Linehan notes that it will create risk down the road. Investors should not assume that the Federal Reserve has absolute ability to fine-tune the economy; as unemployment ticks down, there may be less consensus in the Fed about policy choices and increasing pressure to raise interest rates.

What to Watch For

Linehan says there are two significant risks moving forward. First is the ongoing uncertainty in global politics. From the massive instability and conflict in the Middle East, to North Korean nuclear threats, it has been hard to predict when the next crisis will erupt and what industries may be affected. Second, continued or even worsening dysfunction in Washington could persist and sap investor confidence, which would have a negative effect on markets.

However, assuming these risks remain manageable, the U.S. equity markets offer investors solid opportunity. Linehan believes investors can still look forward to good returns, if somewhat lower in nominal terms due to low yields and inflation.

The views are as of April 4, 2013 and may have changed since that time. This information is provided for informational purposes only and is not intended to reflect a current or past recommendation, or investment advice of any kind. Opinions and commentary do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Stocks and sectors may not perform in line with the managers' expectations. All funds are subject to market risk, including possible loss of principal. The value approach carries the risk that the market will not recognize a security's intrinsic value for a long time, or that a stock judged to be undervalued may actually be appropriately priced. Diversification cannot assure a profit or protect against loss in a declining market.