11th March 2014
It is five years since markets bottomed out in the wake of the financial crisis says Russ Koesterich, BlackRock’s Global Chief Investment Strategist but he still suggests sticking with equities.
In a note issued today, he says: “It was March 9, 2009, when the stock market bottomed amid the throes of the financial crisis. The next day marked the start of an upturn, meaning today could be considered the fifth birthday of the current bull market.
“ And, in true celebratory fashion, investors looked beyond the turmoil in the Ukraine to push stocks to further gains. The Dow Jones Industrial Average advanced 0.80% last week to 16,453, while the S&P 500 Index rose 1% to 1,878 and the Nasdaq Composite added 0.65% to close at 4,336. Meanwhile, in fixed income markets, the yield on the 10-year Treasury rose from 2.65% to 2.79%, as prices correspondingly fell”.
He says the markets quickly got over their jitters about Russia, Ukraine and Crimea.
Although Monday saw a brief selloff and spike in volatility, the effect was modest.
He adds: “The VIX Index (a widely cited volatility index) crept up to the upper teens, which is still well below its long-term average. By Tuesday, markets recovered and again reached new highs. At the same time, investors began moving out of “safe haven” assets such as Treasuries, which explains why Treasury yields rose (and prices fell) last week”.
“Part of the turnaround in sentiment can be attributed to some easing of tensions in the region. Russian President Vladimir Putin disavowed any broader territorial ambitions, which caused a collective sigh of relief. Clearly, though, this is a situation that bears close watching. Crimea has scheduled a March 16 referendum that would determine whether the region splits from the Ukraine and joins Russia, a potential move that is being hotly debated among world leaders. As that date approaches, we may see markets paying more attention to this region of the world”.
He says the US economic data remains mixed. “While financial markets also benefited from some better-than-expected economic data, including improvements in manufacturing as well as a rebound in the jobs market in the US, the February labour market report showed that 177,000 new jobs were created last month, a significant improvement.”
However he adds: “Despite last month’s uptick in jobs growth, the pace of labour market improvements remains sub par compared to previous economic recoveries. The labour market participation rate remains low and long-term unemployment high, reaffirming that the U.S. jobs market is still troubled. Outside of the labour report, the Institute for Supply Management’s non-manufacturing survey (a key gauge of the service sector) also sank to a four-year low in February”.
However now the the bull market is entering is sixth year, he asks what now.
“To start, we would say equities are no longer cheap and that stronger economic growth will be needed to drive earnings and prices higher. But we do believe stock prices are more likely to head higher rather than lower from here.
“Equities still look like a more attractive option than cash or bonds. Cash investments are effectively paying nothing, and traditional areas of the bond market offer little return after factoring in the effects of inflation and taxes.
“As such, we would encourage investors to maintain their emphasis on stocks. Even after a five-year bull market, and prospects for more volatility ahead, both the macro environment (low inflation, low rates and a gradually improving economy) and relative valuations offer sound arguments for overweighting stocks”.