Against this backdrop, we are sticking with our main investment positioning. We think the recent gains can continue and we would remain overweight stocks relative to bonds, which have underperformed both domestic and global equities year-to-date. We still favor technology. The tech-heavy Nasdaq Composite is back where it was at the peak of the 2000 bubble, but earnings growth, not multiple expansion, has been the main driver of the advance. At 30 times trailing earnings, the price-to-earnings ratio on the Nasdaq has not changed much over the past two years and is still a long way from the 175 times earnings that marked the top in 2000.
Investors who are overweight U.S. equities may want to consider decreasing that overweight and taking another look at international stocks. Even with the recent rally, the U.S. is still up only (?) 2.5% year-to-date versus 18% and 12% (in local currency terms), respectively, for Europe and Japan.
That said, we’d once again offer an important caveat: Expect volatility to continue and to be high. While U.S. stocks have managed to advance so far this year, the volatility of daily returns is already 25% higher than it was last year. Expect a continued bumpy ride in the months ahead.
Source: Bloomberg.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.