Another possibility is that an adverse reaction to Federal Reserve (Fed) tightening could rattle markets. But here again, the risks are likely overstated. The Fed is unlikely to hike interest rates before next spring, and slowing economic growth may push the initial data further into 2015. Plus, even when the Fed does start to hike, given the fragile nature of the recovery and still low inflation, the central bank will take its time.
So what should investors take away from the recent bout of volatility?
- More volatility. As I’ve been warning for some time, this period of unusually quiet markets is coming to an end. Investors should expect elevated volatility going forward.
- Favor market segments offering relative value. I continue to advocate that investors place a greater emphasis on relative value than on momentum.
- More modest stock market gains. As I’ve mentioned on several occasions recently, while I believe that stocks still look reasonable and can move higher this year, stretched valuations suggest more volatility ahead and a slower pace of gains during the remainder of the year than experienced during the unusually buoyant markets of 2012 and 2013.
Sources: BlackRock research, 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.