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Perspectives Newsletter Q3 2013
Q: US stocks have enjoyed a strong run over the past four years, despite some notable bumps along the way.Can the bull market continue?
In many ways, the market's run has been surprising given the tepid economic growth and investor unease that have prevailed over the past few years. So what gives?
"Stocks' strong performance in recent years can be credited to the 'Goldilocks' effect," says Russ Koesterich, BlackRock's Global Chief Investment Strategist. "Economic conditions are good enough that stock prices have been able to rise, but not so strong that the Federal Reserve is going to be forced to tighten monetary policy imminently or at a rapid clip." (Tighter policy and rising rates are usually negatives for stocks, in part because they increase borrowing costs for companies.)
Mr. Koesterich believes the stock bull still has room to run, noting that prices should be higher 12 months from now than they are today. "Inflation is low and company balance sheets remain healthy," he says. "And while valuations are close to their long-term average, equities still seem inexpensive relative to the fixed income alternatives." But Mr. Koesterich cautions investors to expect more volatility and a relatively slower pace of gains ahead: "The economic data is looking uneven, and any shift in Fed policy could further unnerve investors."
Selectivity, he says, is key. Mr. Koesterich suggests investors focus on large- and mega-cap US stocks, and sees long-term opportunities in international equities (including emerging markets), which could benefit from better long-term growth prospects.
"Despite the risks, I think stocks can continue to outperform both bonds and cash," Mr. Koesterich concludes. "Overall, I still think investors should overweight stocks in their portfolios."
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