iShares: Outlook for Stocks, Rates and the Fed

Earlier this month, when I looked back at how my first-quarter calls fared, I promised I’d provide more updates to my 2013 outlook now that the second quarter has begun.

In a new piece, “What’s Next: The Critical Answers”, I do just that. In this outlook update, my fellow authors – Jeff Rosenberg, BlackRock’s chief fixed income investment strategist, and Peter Hayes, the head of the firm’s municipal bonds group – and I are answering common questions we’re hearing from investors. Here’s a condensed version of this Q&A.

Q: Will US stocks continue to climb?

A: Given that corporate fundamentals remain strong and US stocks appear cheap relative to bonds, stocks are likely to move higher this year. That said, economic data hasn’t kept pace with the advances, and the US economic environment is likely to get tougher this quarter. That means the pace of gains is likely to slow, and market volatility is likely to increase in coming months.

Q: What might spark a reversal?

A: There are a few potential scenarios that could trigger a major correction including worsening economic conditions in the United States and a new crisis in Europe.

Q: Will interest rates rise?

A: Rates will likely end the year moderately higher, with the 10-year Treasury yield ending around 2.25%, though the rise will likely be slow and erratic.

Q: How will the Federal Reserve act?

A: The Fed isn’t likely to reduce its pace of accommodation any time soon given still-elevated unemployment. However, stronger economic growth could lead the central bank to pull back on the pace of accommodation later this year.

Q: What’s the outlook for emerging markets?

A: Although emerging markets have gotten off to a poor start in 2013, they still should outperform developed markets this year thanks to cheaper valuations.

Q: Where are the opportunities in fixed income?

A: I still like credit, including bank loans, over Treasuries and see opportunities in municipal bonds.

Q: What equity sectors are most attractive?

A: Some equity styles and sectors I prefer include US mega caps and the global technology and energy sectors.

Looking for more specifics regarding what I expect for this year as well as which investments I prefer? You can find more details in the What’s Next piece as well as in my monthly Investment Directions commentary and Market Perspectives papers. You can also send me a tweet, using #askRuss.

Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.