Last week I had the pleasure of speaking with Russ Koesterich, the chief investment strategist of BlackRock (BLK), the largest money management firm in the U.S. with about $4 trillion under management, almost twice that of its nearest competitor. In this post, I'd like to share a few of his thoughts on the financial markets. Before we get into the details, here's a little background on Mr. Koesterich.
Russ Koesterich is a CFA and managing director of BlackRock; he is also a founding member of the Blackrock Investment Institute, delivering BlackRock's insights on global investment issues. In addition to frequent speaking gigs and television appearances, Koesterich is the author of two books, including "The Ten Trillion Dollar Gamble," which addresses ways to build portfolios in light of the growing U.S. deficit.
I asked him about the persistency of the current bull market, whether we are in some stage of a stock bubble, how fiscal policy has influenced the financial markets, where he sees opportunities, and more.
When asked directly, Koesterich said we are not in a stock bubble. He did acknowledge that stock valuations are at the upper end of their historic range, though.
However, with inflation and interest rates at such low levels, this is to be expected. He also said that U.S. stocks are no longer cheap and that future stock returns are likely to be modest.
He raised some concern that a sharp rise in interest rates or inflation would present a headwind for stocks, but he believes a rate increase in the context of an improving economy is more likely and that wouldn't represent a major problem for stocks.
(In his latest weekly commentary for BlackRock, published June 9, Koesterich wrote: "Stocks have benefited from generally stronger economic data, and that should support earnings growth in the second half of the year, even with interest rates on the rise.")
Risks and Opportunities
Koesterich said fiscal policy has been a negative influence on Europe's economy. He also said that U.S. entitlement spending carries a significant risk in three to four years as baby boomers begin to retire in larger numbers, which could cause a sharp rise in interest rates.
He sees opportunities in Japan (hedging the yen), large-cap U.S. stocks, energy, technology and, for the long-term, he likes emerging markets.
Thanks for reading and have a great week!