One factor that may mitigate the impact of higher rates and higher valuations is the fact that interest rates are rising from unusually low levels. At 3%, the yield on the 10-year Treasury is still well below the 20-year average of 4.5%. As such, stocks still look cheap relative to bonds and are still likely to advance in 2014. But given the headwind of higher rates and higher valuations, 2014 gains should be much more muted, slowing to a range of roughly mid to high single digits.
Given this, I continue to advocate that investors raise their exposure to international markets and cheaper parts of the U.S. market, such as large and mega cap stocks and the technology and energy sectors.
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 research, Bloomberg