In addition, investors should be mindful of conditions in credit markets. One of the major reasons volatility has been suppressed is linked to the unusually accommodative monetary policy of the Federal Reserve (Fed) and a very benign credit cycle. Should the Fed raise interest rates sooner than expected and foster a less accommodative regime, this would likely be associated with a further rise in volatility.
So while I still believe that stocks can move higher during the remainder of the year, further gains are likely to be accompanied by more volatility.
What does this mean for investors? Even a modest pickup in volatility will feel different compared to the placid environment of the past several months. To prepare for such a market landscape, I believe investors should consider focusing on asset classes that offer some relative value, and that can help mitigate the impact of a market correction.
In particular, I like an equity mix geared toward U.S. large caps, particularly in energy and “old tech,” and I would avoid the momentum names in social media as well as a large exposure to retailers and consumer discretionary companies. Finally, I also still advocate bringing up international exposure, particularly in Asia.
Sources: BlackRock, 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.