The stock market has powered ahead of the nation’s faltering economy so far in 2013 at the same time that the Federal Reserve keeps supporting U.S. Treasuries by keeping interest rates low.
These seemingly contrary events have left investors so uncertain about what will happen next that BlackRock, the world’s largest asset manager, with $3.79 trillion under management as of Dec. 31, stepped forward Friday to offer three actions for worried investors to take.
“The powerful advance of U.S. stock markets has investors asking: Do the markets have more room to run, or is a correction imminent? First, we think there is almost no chance that the pace seen in the first quarter will continue. But does that mean we’re in the middle of a bubble that will burst? The answer is no,” write Russ Koesterich (left), BlackRock chief investment strategist and iShares chief global strategist, Jeffrey Rosenberg, chief investment strategist for fixed income, and Peter Hayes, head of the municipal bonds group.
As for interest rates, Koesterich, Rosenberg and Hayes predict that rates will drift higher, but slowly and erratically.
“A number of forces are keeping a lid on interest rates, including the low net supply of fixed-income securities (due largely to Fed buying) and a strong demand among investors for yielding assets. The Federal Reserve will not 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, they write in “What’s Next in 2013? 3 Investment Actions for 2013.”
The BlackRock strategists recommend three smart ways for investors to achieve income and return this year:
1) Broaden your bond approach. “Investor demand has pushed interest rates to such lows that it presents new risks,” the BlackRock team says. They recommend that investors allocate to flexible core bond alternatives, increase exposure to credit sectors and implement long/short strategies.
Interest rates should gradually drift higher through the end of the year, with the 10-year Treasury yield ending around 2.25%, they predict. And if the Fed begins to slow down quantitative easing, yields on longer-maturity fixed-income assets such as the 10-year and the 30-year would move modestly higher as prices fall.