That said, I don’t believe that the U.S. market is necessarily condemned to a year of near zero returns. I expect U.S. stocks will finish 2014 with a mid- to high-single digit gain. First, rates are rising from unusually low levels. The yield on the 10-year note is still barely 3%, well below its 20-year average of 4.5%. At these levels, bonds still represent little competition for stocks. Second, a stronger economy this year should translate into faster earnings, which means stocks can advance without a further jump in valuations. Still, last years’ multiple expansion and higher rates arguably constitute a yellow flag for U.S. stocks. Given this, I continue to advocate that investors raise their exposure to international markets and focus on 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