• Consider underweighting Treasuries, particularly as the yield on the 10-year note gets close to 2.5%. While I still believe that any rise in rates will be contained, there is a floor to how low yields are likely to go, thanks to continued strength in manufacturing and a Fed likely to start tapering early next year.
• Consider increasing exposure to cyclical companies, which are supported by the rebound in manufacturing. In general, cyclical companies remain cheaper than defensives, and they will also benefit disproportionately from any improvement in the global economy. It’s also worth noting that even during the relatively weak growth of the last three months, U.S. cyclical companies have gained around 4.5%, roughly double the pace of more defensive sectors. In particular, I like the global technology and energy sectors, and U.S. manufacturers (such as chemical companies) geared to lower energy costs.
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
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