The minutes of the last FOMC meeting released yesterday suggested that the central bank is

likely to maintain its accommodative policy stance in foreseeable future, even after it winds
down its asset purchase program. With waning rate hike worries, stocks are likely to resume
their upward march.
Economic data in general has been surprising to the upside indicating that the economy gained
momentum in the second quarter after coming out of the deep freeze earlier this year. At the
same time, while the labor market is improving, wage pressures are missing, suggesting that
the Fed will not be in a hurry to change its monetary stance.
What Surprised in the First Half
Most analysts had predicted that interest rates will creep up as the Fed gradually winds down its
massive support. But interest rates plunged lower, puzzling most analysts and investors. With
low yields bonds portfolios investments returned to profits after making losses last year. That
situation may reverse soon if interest rates start inching up, which looks possible now
particularly in view of rising inflation worries.
Low interest rates also proved to be a blessing for emerging markets. With the start of taper
talk, foreign investors had rushed for exits leaving EM stocks and the currencies in a downward
spiral. The trend reversed this year with investors returning to emerging markets as they
realized that interest rates in the developed world were not going up as earlier feared.
What May Happen in the Second Half?
Stocks Still Remain Attractive
Most stocks are not cheap now but they are not outrageously expensive either and they still
remain attractive due to lack of any better alternative. A brightening economic picture and low
interest rates are great for stocks and so I would not be surprised to see stocks continuing their
slow, upward march. Investors optimism may get a boost if Q2 earnings and management
guidance improve from the previous quarters.
Invest in Cyclical Sectors
With the economy picking up momentum, I like Technology, Industrials and Energy sectors.
Technology sector has remained mostly out of favor with investors less-than supportive global
macroeconomic environment. Pick-up in the global economy and business spending will benefit
the sector. Per Zacks Earnings Trends, total earnings for the sector are expected to be up 6.4%
from the same period last year on 4.7% higher revenue.
Continued improvement in the manufacturing activity bodes well for Industrials.
Rising geopolitical stress has pushed energy prices up this year, resulting in energy stocks
outperformance during Q2 and while the prices have softened of late, the sector still looks
attractive. Per Zacks estimates, Oil/Energy sector is likely to see earnings growth of 8.1% for
Q2.
Record low yields were supportive for defensive sectors during the first half but they now look
quite expensive considering their growth potential.
Prepare for higher volatility
Markets have remained unusually calm so far this year but investors should prepare themselves
for more twists and turns in the coming months. Mid-term elections and speculations over the
timing of Feds rate hike may lead to some turbulence. And the possibility of pullbacks remains
high.
I recommend adding some high-quality, cash-rich, dividend paying stocks to the portfolio. These
not only shine during volatile environments but also outperform on risk-adjusted basis over
longer-term.
Stay Diversified
Among developed international markets, I still like Europe and Japan. As many emerging
markets saw substantial gains earlier this year, their gains during the second half may be rather
muted. Looking at the longer-term scenario, India and Mexico look poised to benefit from
reform-oriented and business-friendly governemnts.
Among commodities, while agricultural commodities may gain from weather related issues, they
are generally more volatile and suitable for higher risk tolerant investors. Investors could
consider a small exposure to buy ranked precious metal ETFsPALL and PPLT. Both these
metals are positioned to benefit from supply constraints and rising demand,