Despite signs that most of the U.S. economic softness of the
last three months
was weather related
, equities have struggled to push higher lately. The recent
sluggish performance of U.S. stocks, especially those in the
biotechnology and technology industries, is leading some market
watchers to question
whether we're witnessing the bursting of an
My take: I don't believe that U.S. equities overall are in a
bubble. Though stocks certainly are no longer cheap, valuations
are still a long way off from the late 1990s or the run-up to the
1987 stock market crash. That said, valuations certainly have
started to become an issue, particularly for certain segments of
For instance, at more than 25x current earnings estimates,
valuations for small caps look outright expensive. And particular
pockets of the market - like last year's growth stocks-are
verging, or have already tipped into, bubble territory. The
average price-to-book ratio for the Nasdaq Biotechnology Index is
more than 7. As for Internet stocks, we are back to a world
reminiscent of the late 1990s, where only the most creative
metrics can justify the premiums being paid for certain
Does all this suggest that the market has peaked and stocks
are likely to come crashing down? Not necessarily. It's important
to note that not all stocks look expensive. In the United States,
the energy, healthcare, and surprisingly technology (not every
tech stock is trading like Facebook) sectors are all trading
comfortably below their historic valuations. Outside of the
United States, stocks in Europe, Japan, and most of developed
Asia range from reasonably priced to cheap.
In addition, while the market is certainly vulnerable to a
spike in interest rates or an economy slowing more than expected,
I don't expect these scenarios to occur. Rather, given my
expectations of modestly accelerating economic growth and
continued low rates in 2014, I still believe that the U.S. market
will push ahead this year.
So what does this mean for investors? Given that valuations in
certain parts of the market do look stretched, investors may need
to shift strategies from what worked last year. Here are three
moves to consider:
Go for value.
Rather than chase last year's winners -
poor strategy year-to-date
- investors should consider embracing some of last year's losers
and adopting a general bias toward value-oriented areas of the
many investors do appear to be doing
. Year-to-date, U.S. value stocks advanced roughly 2.1 %, while
U.S. growth equities are flat.
2. Overweight large and mega cap stocks.
As I've long been advocating, I believe that investors should
consider trimming their allocations to small cap stocks in favor
of gaining greater exposure to large and mega cap names. To be
sure, large cap names are no longer cheap. U.S. large caps, for
instance, finished March at 17.25x trailing earnings, comfortably
above the 60-year average and the highest level in four years.
Yet large caps names have still gained around 1.5% year-to-date,
while small caps are down nominally on the year.
3. Embrace international markets.
As I've been noting for some time,
emerging markets can offer compelling long-term value
. In the developed world, meanwhile,
I like Japan and the eurozone
. While Japanese stocks have struggled this year, European
equities have outperformed U.S. stocks. And though both Japan and
Europe are less profitable, and are likely to grow slower, than
the United States, they both possess one characteristic in short
supply locally: value.
Sources: Bloomberg, BlackRock Research
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
and you can find more of his posts
International investing involves risks, including risks
related to foreign currency, limited liquidity, less government
regulation and the possibility of substantial volatility due to
adverse political, economic or other developments. These risks
often are heightened for investments in emerging/ developing
markets, in concentrations of single countries or smaller
Funds that concentrate investments in a single sector will
be more susceptible to factors affecting that sector and more
volatile than funds that invest in many different sectors.