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September Taper Won’t Surprise, Watch for Guidance: Koesterich

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"The good news for investors," says BlackRock chief investment strategist Russ Koesterich, "is that at this point (tapering) is probably well reflected in the market."

In the attached video, Koesterich, who's also the chief global strategist at iShares ETFs, says that what has been billed as the single most important - and talked about - event of the month may actually turn out to be rather sedate, once the Fed actually reveals how much it plans to scale back its $85 billion monthly asset purchase program.

Related: Stocks Ignoring Taper Talk…For Now

"It's going to be a very gradual, light, tapering. I'll define that somewhere between ten and fifteen billion dollars," he says, adding that he doesn't expect "a very violent movement on the number," when the details are released later this afternoon.

"The bigger question is what other qualitative guidance we get" on things like short-term interest rates, growth expectations and the longer-term outlook for tapering, all of which will surely be addressed in the newest Summary of Economic Projections which gets updated quarterly.

On that front, Koesterich says he is looking for confirmation from the Fed that we are in a "gradually improving" economic environment. It's the kind of climate that can withstand higher interest rates, and the kind of market he thinks favors equities over bonds.

Related: Payrolls Miss, Tapering May Be Scaled Back Says John Canally

"Even if the rise (in rates) is modest, investors are still better off having an overweight to stocks," he says.

To that point, this dual-titled, JD, MBA, and CFA says the key for investors will be getting the mix (of stocks and bonds) right.

"The types of stocks you want to own in that (rising rate) environment are very different than what you've had in an environment characterized by very low, and often negative, real interest rates."

For some, the obvious response is to simply flee fixed income all together, a trend that been marked by huge outflows from bond funds over the past couple months. While Koesterich says these outflows "makes sense" and are "rational," he's also glad it hasn't been worse than $140 billion.

He's says compared to the $1.5 trillion that flowed in to bond funds since 2008, the recent retreat is still very modest, but points out that the big question going forward is if future outflows from bonds continue at a measured pace, or accelerate as investors start to realize some of their losses they've been seeing recently.

Finally, given the soft jobs market, weak wage growth, and the latest CPI data, Koesterich thinks it will be some time before we can say for sure whether outgoing chairman Ben Bernanke's unprecedented policies helped avoid disaster, or simply deferred it.

"In my mind there's still a longer term question mark about how inflation will unfold over the next five to ten years, given the fact that we've never been in this situation before."

More from Breakout:

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