Assuming this is the environment we’re in for 2014, there are two investment implications:
1. Low-for-longer rates will support stocks. While the Fed is likely to start to taper at some point in the next several months, short-term interest rates should remain anchored at zero throughout 2014, and potentially much longer. Low short-term rates will continue to support stocks by keeping margins and valuations higher than they would otherwise be.
2. Consider underweighting Treasury-Inflation Protected Securities (TIPS). I still don’t advocate increasing exposure to inflation hedges, particularly if those hedges are expensive. The lack of inflation is one reason that TIPS have underperformed so dramatically year-to-date. And despite the losses, this asset class, particularly long-dated TIPS, is still not cheap. Finally, while TIPS hedge against inflation, they’re vulnerable to rising real rates.
To be sure, none of this suggests that inflation won’t eventually pick up. But for now, to the extent we remain in a world characterized by slow wage growth, excess capacity, and modest credit creation inflation is likely to remain low, at least for the next year or so.
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.
Sources: BlackRock Weekly Commentary, Bloomberg