So what does this mean for investors?
I expect that continued Fed accommodation will help support stocks, which look reasonable on a global basis, over the next six to 12 months. However, last week’s rally seems aggressive for a few reasons: All Congress could fashion was a temporary solution, economic growth remains soft and the Fed will likely start to taper at some point in the next six months or so.
In addition, though US stocks still look reasonable compared to their historic valuations, they are looking fully valued relative to an environment of 2% growth. Though I continue to see good bargains outside the United States, there are fewer bargains in the US market.
As such, I continue to advocate that investors consider raising their allocations to international equities, and within the US market, the energy and technology sectors appear to be more reasonably priced. Finally, given that I expect the Fed to implement a more conservative taper, I’m now advocating that investors overweight MBS relative to other fixed income instruments.
Source: Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.