A focus on the Fed. Attention is likely to turn back to the U.S., specifically the Fed. While the central bank is taking note of recent events in Europe and China, comments from Chairman Janet Yellen last week confirmed that the committee’s bias is to begin raising rates this year. This is consistent with BlackRock’s view and confirms our caution on short-term rates, a risk that was on display last week as two-year Treasury yields surged between Wednesday and Friday, ending the week at 0.65%.
Outperformance abroad. At BlackRock, we continue to believe that international markets (notably Japan and Europe) look poised for outperformance. Although we see U.S. stocks outperforming bonds, as we’ve seen year-to-date, the combination of relatively expensive valuations, a strong dollar and a Fed readying to lift rates is keeping a lid on U.S. stock market gains.
On the other hand, equities in Europe and Japan likely can move higher. Even in the event of a “Greek exit,” the European Central Bank (ECB) possesses the necessary tool kit to manage any contagion to other European countries. And despite last week’s stumble in response to the bear market in China, Japanese equity markets maintain good momentum and reasonable valuations. In other words, despite the ongoing drama overseas, I would still look internationally for the most compelling investment opportunities.
Source: BlackRock
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.