Though 2014 so far has seen a number of surprises, the year
has played out mostly according to
the 2014 outlook
my colleagues and I laid out late last year.
First, about those surprises: The U.S. economy's
weather-related first-quarter slowdown was unexpected as were the
geopolitical tensions dominating headlines. More importantly, we
were surprised by the magnitude of the spring bond rally and the
associated drop in interest rates.
Still, as we expected, stocks have outperformed bonds, and the
global economic recovery remains on track. So, as
and I write in the Mid-Year Update to our 2014 Outlook -
The List: What to Know, What to Do
, we're sticking with our early-year outlook. We continue to
see stocks finishing the year with returns in the mid to high
single digits, interest rates trending modestly up and the
economy improving, albeit with below-trend growth.
As for what this means for investors, to navigate in this
market environment, we suggest focusing on five portfolio
Favor stocks with a caveat.
While stocks aren't cheap, we don't believe they're in a
bubble. Rather, their value is perhaps best characterized as "not
unreasonable," particularly given the low inflation environment.
As the economy improves, we believe stocks have room to move
higher this year. In addition, they still appear more attractive
than the alternatives, notably cash and bonds. But given that
many areas of the market do look expensive, a selective approach
is key. We would focus on those market segments that offer good
value and potential downside protection, such as large- and
mega-cap stocks, cyclical sectors and international equities.
Make sure you have sufficient exposure to international
Today, most of the stock market bargains are found
overseas. So, while increasing international exposure makes sense
in general, it makes even more sense these days. We would
encourage investors to consider investing in international
particularly those in Europe and Japan
, as well as in select emerging markets.
Choose your bonds wisely.
Though bonds remain an important source of income and play
a vital role in a portfolio, there are very few bargains out
there, yields are likely to be volatile and some areas of the
bond market are more vulnerable to rising rates than others. So,
we suggest considering a flexible, go-anywhere bond portfolio
that can make adjustments on the fly. At the same time,
we're cautious of shorter-maturity bonds (those in the 2- to
, which could face greater upward movement in yields and
resulting principal losses. We also see opportunities in
municipal bonds (more on that below).
Keep munis in mind.
Municipal bonds saw a significant rally in the first half
of the year, but similar returns are unlikely in the second half.
Still, given their tax-exempt status, and improving credit
conditions among state and local issuers, munis offer some
relative value. While they may not be cheap per se, they continue
to look attractive versus both Treasuries and corporate
Go beyond traditional stocks and bonds.
The traditional asset classes are not without their
challenges today. Stocks are no longer cheap, and neither bonds
nor cash offer compelling value. By incorporating
non-traditional, or alternative, strategies into your investing
arsenal, you can potentially enhance diversification and amplify
your portfolio's growth potential. Diversification doesn't
guarantee profits or prevent loss (nothing does), but it does
allow you to spread your risk across a broader set of instruments
that may respond differently to a given set of market
To be sure, the second half may bring surprises as
well. Given today's low market volatility, an unexpected
further escalation of violence in Iraq would likely cause at
least a temporary correction
. And we're closely watching for any signs of a pickup in U.S.
Still, for the foreseeable future, we believe the five
investing opportunities above are worth considering. To learn
more about navigating markets for the remainder of the year,
check out the Mid-Year Update to our 2014 Outlook -
The List: What to Know, What to Do
as well as BlackRock's other mid-year outlook pieces:
the special mid-year check-in edition of
the BlackRock Investment Institute's mid-year
Sources: BlackRock, Bloomberg
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
The opinions expressed are as of June 27, 2014, and may change
as subsequent conditions vary.
Fixed income risks include interest-rate and credit risk.
Typically, when interest rates rise, there is a corresponding
decline in bond values. Credit risk refers to the possibility
that the bond issuer will not be able to make principal and
interest payments. There may be less information on the financial
condition of municipal issuers than for public corporations. The
market for municipal bonds may be less liquid than for taxable
bonds. Some investors may be subject to federal or state income
taxes or the Alternative Minimum Tax (
). Capital gains distributions, if any, are taxable.
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 or in concentrations of single countries.