In addition, as illustrated by last week’s losses, and the steep sell off in Japan, any confusion over central bank policy is likely to cause an increase in volatility. This doesn’t mean that investors should abandon stocks; rather, they should simply be prepared for more bumps along the way.
2.) Be cautious of US small caps and US dividend stocks, especially defensives ones like utilities. These are equity segments whose valuations have been most distorted by unusual monetary conditions.
3.) Emphasize credit over Treasuries. With Treasury yields likely to creep higher throughout the year as the Fed gradually changes its policy, investors should consider minimizing their exposure to Treasuries and opting instead for more attractive credit sectors like high yield and BBB-rated bonds. These fixed income sectors are accessible through the iShares High Yield Corporate Bond Fund (HYG) and the iShares Baa-Ba Rated Corporate Bond Fund (QLTB).
In short, investors can expect that market performance in coming months is likely going to continue to be all about the money – central banks’ money that is.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.
The author is long HYG.