With equities, it is hard to find bargains, but we believe stocks are still the best place to be. But you’ll have to be even pickier about the stocks you select and consider expanding your investment horizons beyond the U.S. We prefer U.S. cyclical stocks, Japanese equities, and emerging markets in Asia, but are keeping an eye out for opportunities in Europe, where the looser monetary policy could help stocks, particularly cyclical companies.
As for fixed income, we would still tread lightly in the bond market. Short-term bonds will bear the brunt of a Fed rate hike. Indeed, as a write in in my weekly commentary, this is already starting to happen; the yield on the two-year U.S. Treasury rose last week to over 0.65%, the highest level since the spring of 2011. Longer-term rates, on the other hand, should inch up at a gentler pace and are likely to remain low relative to their history. But all of this means finding a steady income stream will continue to be a challenge.
This is the world as my BlackRock colleagues and I see it. Of course, as is always the case in financial markets, uncertainty is one of the few certainties. In particular, we believe that most of the geopolitical trouble spots throughout the world are ‘frozen conflicts’; few are likely to be reconciled over the next year. Here at home, the big risk would be a quicker tightening campaign by the Fed that takes investors by surprise.
Overall, however, investors should avoid the temptation to cash out all their gains. Stocks may not march upward in a straight line, but we believe they should continue to do relatively well in 2015—and better than bonds and cash.
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.