That all said, I don’t believe we’re at the start of an imminent “Great Rotation” of capital from bonds to stocks. As I’ve mentioned before, there are significant headwinds still facing the global stock market, including political uncertainty in Europe and the ongoing Washington fiscal drama. It likely will take a while for investors to feel comfortable fully embracing equities.
In addition, we’re not likely to see a large increase in yields anytime soon as factors keeping a lid on rates—such as central bank buying of US Treasuries, demand for Treasuries from institutional buyers and a lower supply of long-dated bonds—are still in place.
Still, ultimately, I expect equities to do relatively well this year given not only the hidden risks lurking in fixed income but also the global economy’s slow but positive economic growth, low inflation and reasonable valuations.
Though equities’ uphill climb will likely be slow and volatile, I believe this volatility is worth accepting in exchange for potentially higher returns.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.