ETF Investors Should Ease Up on Equities, Look to Fixed Income

After years of outperforming, the equities market bull rally is running out of steam, with a number of global uncertainties weighing on riskier assets. Consequently, overweight stock exchange traded fund investors may want to consider revisiting the fixed-income theme.

“What does a low-growth world, pricey stock valuations and a more cautious Fed add up to? Expect low returns, spikes in volatility and a need to cast an ever-wider net for yield,” BlackRock strategists said in a research note. “As a result, we’re more cautious on equities and risky assets in general. At the same time, we have upgraded U.S. Treasuries and fixed income overall to neutral.”

BlackRock has downgraded its outlook on U.S. equities to neutral from overweight.

Year-to-date, the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) gained 3.5%, SPDR S&P 500 ETF (NYSEArca: SPY) rose 3.0% and PowerShares QQQ (NasdaqGM: QQQ) dropped 3.7%.

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Even with the pullback over the first few weeks, U.S. stocks have enjoyed a multi-year run, which pushed equities to elevated levels, hovering around the 70th percentile of their long-term historical range. Moreover, despite the Federal Reserve pushing off an interest rate hike, the equities market may continue to find pressure from difficult-to-forecast events and ongoing weakness in employment growth.

Additionally, BlackRock upgraded its overall fixed-income allocation to neutral from underweight, with a preference for Treasury Inflation Protected Securities over traditional U.S. Treasuries in light of rising inflation expectations.

“We have upgraded U.S. Treasuries and fixed income overall to neutral, and remain cautious on risk assets,” BlackRock added.