History says to favour large caps

US stock markets are fully but fairly priced in today's environment of low inflation, economic expansion, and robust earnings. US bond prices are set to decline further as the Federal Reserve Board begins to tighten, but investor sentiment may overshoot on the downside, creating opportunities. The big cyclical surge in equities and the Fed-fuelled rally and spread narrowing in bonds are largely behind us; return expectations for both asset classes over the next three to five years are modest (though greater than cash). In the current context of benign equilibrium, this is not a time for l...