BlackRock expects equity gains will be more muted this year than last year and the ride will be rockier,says BlackRock’s chief invesment Strategist Russ Koesterich.
Although stocks did stage a late-week recovery, volatility has been rising.
The VIX Index (a measure of market volatility often called the “fear index”) jumped to a 13-month high of 21.44 last Monday when stocks endured their worst single-day losses since last June. In addition to rising volatility, fund flows are also pointing to a growing sense of investor risk aversion, Koesterich argues in BlackRocks weekly comments.
According to Koesterich, so far this year, there has been aggressive selling out of equity funds and into bond funds, a clear sign of investor unease.
Despite the increasing uncertainty, rising volatility has been modest.
According to Koesterich: “Sentiment is more uneven than it was at the end of 2013, but it is important to put all of this in perspective. Even at the market lows on Monday, the peak-to-trough downturn was still well below the 10% threshold that is usually associated with a “market correction.” Also, while volatility is higher now than it was last year, it has merely reverted to its long-term average.”
Looking ahead, given lackluster U.S. economic data and ongoing issues in emerging markets, BlackRock expects that markets will remain more volatile than they were in 2013.
“Even so, we continue to believe stocks offer better value than bonds (a view reinforced by the market recovery we saw on Thursday and Friday)”, Koesterich says.
BlackRock would suggest that periods of weakness like we have seen over the past couple of weeks provide opportunities to selectively add to equity exposures while trimming bond holdings.