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After the Fed indicated last week that tapering could begin as early as this fall, 
coupled with concerns about Chinese growth, stocks sharply reversed course and Treasury yields spiked. I expect market volatility to last through the summer as investors remain uncertain about the future of monetary policy and the strength of the global recovery. That said, I wouldn’t advocate abandoning stocks. Here’s 3 reasons why.
So writes Russ Koesterich (http://isharesblog.com/blog) in edited excerpts from his post* entitled Despite More Downside Risk, Stick with Stocks.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Koesterich goes on to say in further edited excerpts:
1.) The basic ingredients of the 2013 equity bull market remain in place. Nominal interest rates remain relatively low, inflation is not a threat and corporate balance sheets remain healthy. In addition, stocks are reasonably priced and still look cheap relative to bonds.
2.) The recent rise in yields is extreme. While I expect that bond prices will continue to come under pressure over the next year, a number of factors keeping a lid on rates still remain in place. In other words, while rates will likely continue to rise, I predict that ultimately the rise will be modest and include some near-term pullback. I expect that the 10-year Treasury will finish the year around 2.5%.
3.) The U.S. economy can probably withstand a reduction in the pace of Fed asset purchases, assuming a gradual taper that is not so aggressive as to derail the recovery. This could help support stocks.
For these reasons, I expect that equities will ultimately finish the year higher and I still like equities over the long term.
There are areas of the equity market that warrant caution, however. Bond market proxies (such as the utilities sector and REITs) look particularly vulnerable in an environment of rising real rates (It’s important to note that higher real yields, not rising inflation, are driving today’s higher nominal yields as investors are demanding more compensation for holding bonds).
Instead, I prefer select cyclical sectors such as energy and technology….
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://isharesblog.com/blog/2013/06/24/despite-more-downside-risk-stick-with-stocks/ (Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog; ©2010-2013 BlackRock. All rights reserved)
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