Emerging markets remain a worry among investment strategists.
“A lot of people have trouble grasping (that) these economies are driven by exports,” Mr. Shilling said. “They are not domestically stimulated. Where do those exports go? To North America and Europe. If you have slow growth in North America and Europe, (it) limits export growth and subdues economies in these ... countries.
“China is not an independently growing economy,” nor are other emerging markets, Mr. Shilling said.
A rise in the federal funds rates could lead to better capital allocation and a boost for the economy. Mr. Hopper said the Fed's zero interest-rate policy “in essence is contributing to a misallocation of capital across the economy. As you begin to raise interest rates you remove the (false) support you have for non-economic projects and that capital is freed up to shift into economically viable projects. That process of allocating capital more efficiently and effectively actually will boost activity going forward.”
The strategists believe appearances can be deceiving in looking at the economic outlook, as well as seeing a dichotomy between the U.S. and non-U.S. markets.
Many investors “are overly pessimistic about the prospects of economic growth,” Mr. Paulsen said. For U.S. economic growth, “it's not going to bounce all that much because it's not really slowed down that much,” he said.
“There might be a bigger bounce abroad,” Mr. Paulsen said. “We are already growing at 2.5% to 2.75% and maybe we grow close to 3%” in 2016. The rest of the world, like Japan or Europe, might go from zero to 1.5%, which is a bigger change.”
“While everyone else is trying to put the recession behind them, the U.S. is at full employment and is going to have to tighten” by raising interest rates, Mr. Paulsen said. “The U.S. has crossed over (into) full employment, while no one else is even close to it.”
In the U.S., growth has come without any negative financial consequences such as price and wage pressures, Mr. Paulsen said. “But now that we have reached full employment, if we continue to grow it will have good and bad effects for the financial markets. It will increase sales, but it will also increase cost-push pressures, which will challenge profit margins. It will also necessitate the need to raise interest rates, which will challenge (market) valuation levels.”
“But that's not the case almost everywhere else (in the world),” Mr. Paulsen said. “If you get a bounce in Europe, there are no negative consequences for the financial markets ... same in Japan. If China bottoms out, their growth rate is not going to create a lot of negative consequences.” But it will create consequences in the U.S.
The strategists all see the Federal Reserve raising rates in 2016, forecasting a 2016 year-end federal funds rate of 50 to 150 basis points.
With equities generally seen as the key risk-seeking asset in diverse portfolios, assets owners will face challenges reaching their return assumptions with equity market predictions modest at best.
Mr. Hopper said the markets will challenge asset owners in reaching their assumed investment rate of return.
“We've had a few years of pretty good returns,” Mr. Hopper said. ”And sometimes you are not going to hit 10%; sometimes you are going to hit 5%. That's kind of where we are at in the cycle. The bull market has run for a while. It's brought us some pretty good returns in the past several years. So when it comes to a year when there is increased uncertainty and when the Fed is beginning a new (rate) cycle, it's not uncommon to see a weak year. ... But it is also just one year. And we are investing for the longer period.”