OREANDA-NEWS. July 03, 2013. Prudential market experts say they expect the U.S. economy to continue its recovery and still fragile global markets to begin to stabilize over the rest of the year and into 2014. However, U.S. fiscal policy remains a drag on the economy and Federal Reserve policy could create some volatility depending on when the Fed decides to begin easing interest rates higher, through the so-called “tapering” many have been expecting.

The experts, all from businesses of Prudential Financial, Inc. (NYSE: PRU), outlined their views today at the Prudential 2013 Midyear Global Markets & Economic Outlook briefing in New York City.

A replay of the outlook briefing is available on Prudential’s newsroom.

Ed Keon, managing director of Quantitative Management Associates and a member of its asset allocation team, said stock markets have come roaring back following the recent financial crisis and a “near-miss” of a second Great Depression, more than doubling from their lows of March, 2009. Though many investors remain fearful as they watch carefully to see how the Federal Reserve may alter its policy, he believes the economic recovery is likely to continue and could lead to robust GDP growth in 2014.

“Extraordinary actions by the U.S. Federal Reserve have had a profound influence on the markets and the economy, but if the Fed reduces its support, will the economy and the markets come crashing back to earth?” Keon said. “Might the Fed’s actions so far have already sown the seeds of future inflation and instability? Ultimately, we offer an optimistic view of the economy, and suggest that the recovery is real and likely to gain strength over the next couple of years.”

Quincy Krosby, a Prudential market strategist, noted that the U.S. is on the road toward interest rate normalization as long as the data continue to gain traction. She also said that global markets will face detours along the road to normalization.

“As employment data gain modest traction, markets will obsess and unwind as taper concerns similarly gain traction. The Federal Reserve will most likely employ the 'increase or decrease' phase as it emphasizes that it remains data-dependent,” Krosby said. “But markets will interpret the data as well, and act accordingly. Nonetheless, the re-pricing of assets, while inherently volatile, will ultimately leave markets with a firmer underpinning.”

John Praveen, chief investment strategist for Prudential International Investments Advisers, is also optimistic about the market recovery, though he agrees that volatility will be in play until there is more certainty about the Fed’s interest rate and liquidity strategy. He believes that for the remainder of 2013, global equity markets are supported by a number of positives, including: low interest rates and plentiful liquidity; strengthening global growth and benign inflation; improving risk appetite as the Eurozone continues to re-stabilize; a healthy earnings rebound and attractive valuations.

“However, global equity markets are likely to remain volatile and continue to struggle in the near-term on heightened anxiety about the Fed’s exit strategy,” Praveen said. “The global equity rally is likely to resume once the current interest rate and liquidity uncertainty eases with Bernanke and other Fed officials reassuring that the Fed is unlikely to 'taper' QE buying until late 2013/early 2014, and Abe-Kuroda delivers the next tranche of stimulus and policy measures in Japan.”

In the fixed income markets, Michael Lillard, chief investment officer of Prudential Fixed Income, views the recent turbulence in the fixed income markets as an overreaction to the Federal Reserve’s plan to begin “tapering” its quantitative easing program later this year provided unemployment continues to trend lower.

“In particular, the sell-off in the credit-related sectors was fueled by a shift in market technicals, not fundamentals, resulting in market dislocations that have created long-term value opportunities,” Lillard said. “We expect interest rates to remain relatively low from a historical perspective, and while they may drift somewhat higher over time, the extreme volatility we’ve witnessed recently is unlikely to persist.”

The improving economy and market rally has also been a positive for the commercial real estate market, says Cathy Marcus, managing director at Prudential Real Estate Investors. Yet, as much of a boon as a strong recovery represents, the commercial real estate markets are not banking on it to the same extent as other sectors because the lack of new development is keeping supply in check.

“A significant recovery would be good for markets overall, but we are not relying on that to continue delivering strong real estate returns this year,” Marcus said. “As long as the economy remains stable or improves – and there are no major shocks – the real estate sector will stay healthy.”

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