ING Investment Management

By slowly normalizing policy, the Fed is passing the responsibility of pricing risk back to the markets, resulting in higher volatility. The health of the emerging markets is vital to global growth, as developing countries have doubled their contribution to global GDP over the past decade to nearly 40%. S&P 500 corporations derive half their revenue from overseas; support from global consumerism and manufacturing is on track to continue. Broad global diversification across equity and fixed income markets is the best way to protect against volatility.

Does the title sound familiar? Think feral instead of frugal, and William Blakes "Tyger, Tyger, burning bright" may start to flicker between the synapses of memory and an English lit class you once soldiered through. But even if you havent read "The Tyger", its theme is aptly captured in the opening line and its image of a big flaming kitty cat. Essentially, Blake saw reality in duality: To appreciate the ferocious feline in all its glory is to come face to face with the same force that created "The Lamb", another entry in the poets Songs of Innocence and of Experience.

Given rich valuations globally, we remain broadly neutral on interest rate risk with the exception of Japan.

Why cant we just will our desired political outcomes the way the most fervent seemingly can impact ballgames? After watching Fenway Park packed to the rafters with Red Sox faithful exercising their sovereign and ethereal right to psychically encourage baseballs out of the yard and knowing that millions of others in Red Sox nation were doing the same in front of their televisions were left wondering if the fans of Team U.S.A. can apply a little of that classic Carlton Fisk mojo a few hundred miles down I-95.

The stage was set for an October selloff, but markets treated investors to another round of across-the-board gains. Headlines comparing todays equity market with 1999 are way off; the current rally has been driven by solid corporate fundamentals, and the market remains compellingly valued. Global economic growth remains sluggish, and eventual Fed tapering is likely to introduce volatility into markets worldwide.

If the monotony of high school lulled you into a catatonic state the semester you were supposed to read Brave New World, heres the CliffsNotes summary of what you missed. Aldous Huxley imagined a futuristic utopia in which the government promotes economic and emotional stability through the plentiful use of a soporific opiate called soma. Soma allows the mind to take a holiday from worldly problems via a gram, or two or three. Imagine the chaos into which this fictional world would descend were the government to abandon its role as pharmacist to the masses.

Good economic news in developed markets has been overshadowed lately by the bad (burgeoning Asian currency crisis) and the ugly (Syria). Unwinding central bank support from the markets will be arduous; it is already contributing to destabilization of certain emerging market currencies. News out of Washington this autumn tapering, Fed leadership and the debt ceiling has the potential to add volatility and uncertainty. The U.S. equity market has been the place to be this year, but diversification remains key.

While it?s been said that a picture is worth a thousand words, some pictures are just not that complicated. Take the current U.S. yield curve, for example, our interpretation of which can be boiled down to just a handful of syllables: ?zero interest rate policy? and ?taper?.

Extraordinary returns in the fourth year of a bull market remind us that long-term defensiveness cant be rationalized. July saw remarkable returns across global equity and fixed income markets, with the exception of U.S. Treasuries. Investors would be well served to ignore media drama and fear mongering and simply follow the fundamentals. Five years spent worrying about Armageddon is too long, but theres still time to get back to a normal allocation.

We are constructive on interest rate risks in many developed and emerging economies as global central banks reinforce accommodative monetary policy. We favor the U.S. dollar versus the Japanese yen, the Euro and other developed market currencies. Credit spreads should narrow from current levels as the markets gain confidence and the Treasury market stabilizes. preads offer more than adequate compensation for likely credit losses and a further rise in interest rates. Spreads have been pressured to pre-QE3 levels and mortgages look attractive at these higher levels as prepayment speeds slow.

Though markets were whipsawed by the announcement, the Feds plan to step aside and allow normalization is a good thing. Today, the primary risk for investors to hedge is economic growth and the strong equity returns it tends to produce not financial Armageddon. While risks in Europe and China persist, U.S. fundamentals look relatively strong. Two consecutive quarters of S&P 500 earnings growth prompts a forecast update.

Though markets were whipsawed by the announcement, the Feds plan to step aside and allow normalization is a good thing. The primary risk to hedge is now economic growth and the strong equity returns it tends to produce not financial Armageddon. While risks in Europe and China persist, U.S. fundamentals look relatively strong. Its not too late for investors to move away from defensive positioning and back toward a standard allocation.

Fears of Fed tapering are overblown; we expect global funding conditions to remain easy. We continue to favor the U.S. dollar and are bearish on the euro and the yen; we are cautious on EM local currencies, as volatility is likely to persist.Spreads are appealing at current levels, with higher-quality industrials offering the most attractive risk/reward.

The S&P 500 has opened 2013 with its best year-through-May return since 1997. U.S. Treasury prices, in contrast, plunged last month on talks of Fed tapering. Dont expect the reflation in bond yields to continue in the near term, as the Fed continues to struggle in its current war against deflation. Fundamental business activity not quantitative easing is the wellspring of sustained economic growth, creating lasting sales and profits. For investors, the two biggest self-defeating fears continue to be 1) the fear of buying equities and 2) the fear of buying bonds.

How do you like them apples? By pointing out some Excel blunders in the data of Harvard economists Reinhart and Rogoff, a UMass-Amherst grad student appears to have gotten their number and in the process discredited their seminal work touting the merits of austerity. Though Good Will Hunting fans may be amused to see a couple of Harvardians get their comeuppance, you don?t need the titular character?s wicked smarts to deduce that harsh government spending cuts may not be the best way to pick up your economy.