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Economy showing signs of improvement

Spotlight On Finance

— Of course financial markets tend to soak up infusions of money when economic activity fails to do so. That makes the massive quantitative easing programs in the United States and Japan important for investors. While those massive money flows do not repeal the forces that normally drive the economy and the financial markets, they can certainly distort them for a period of time.

Thus, quantitative easing may make it safe to buy equities even after the strong rallies we have seen in many world markets. But investors are extremely optimistic about equities, and that typically raises the shorter-term risks of buying. If spreading global concerns cause the markets to sell off in coming weeks, long-term investors should have some good opportunities to add to equities.

Developed International

European equities have done well since last summer, but underlying economic growth has not been as strong. And European authorities have not provided as much money to fuel economies there, so continued improvement is probably less likely than in other regions.

Japan hopes that a larger “money pump” will finally free their economy from deflation. That leaves Japanese savers looking for overseas investments, while the weakness of the yen makes it harder for U.S. investors to profit from the equity rally there.

The Pacific economies benefit from growth in the emerging economies and from rising natural resource prices, making improving global growth positive for that area.

Emerging International

The emerging economies are the cornerstone of strengthening global growth. Their growth should improve, but it will probably be at a slower rate than they have historically grown. That allows investors to worry when improvement lags high expectations and tends to make equity prices more volatile. Yet solid growth rates and attractive valuations suggest long-term investors should be rewarded.

Small and Mid Cap Domestic

Small-cap equities have underperformed larger stocks recently, but should perform better if the economy grows. Equity trends and the economic outlook suggest midcap companies have more potential than the smallest ones.

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