A seesaw week for U.S. stocks ended on the upside last week, though the rally was more a function of slow growth rather than a booming economy. We are seeing this dynamic more and more: when bad news is good news, and vice versa, which plays a part in keeping the markets volatile. Read more about my thoughts on this in my weekly commentary.

The irony is not lost on us.

With the notable exception of the labor market, U.S. economic data are generally running below expectations, to the point where an index of economic surprises (Bloomberg ECO U.S. Surprise Index) is now at its lowest level since 2009. But instead of selling, investors are taking solace in the fact that low inflation and the moderating economic growth may lead the Federal Reserve (Fed) to increase interest rates at a slower, gentler pace.

Take last week’s Fed statement. While the central bank removed the word “patient” and set the stage for a normalization in interest rates later this year, its recognition of the recent economic softness was interpreted as a dovish stance. Treasuries rallied on the announcement, with the yield on the 10-year Treasury dipping back below 2%, as equities swung from a loss to a 1% gain.

The only loser last week was the U.S. dollar. However, the dollar has been rapidly rising so far this year, putting many export-dependent companies in a difficult situation and forcing analysts to lower their forecasts of companies’ earnings.

We are steady on this bumpy ride.

Against this backdrop, we are sticking with our main investment positioning. We think the recent gains can continue and we would remain overweight stocks relative to bonds, which have underperformed both domestic and global equities year-to-date. We still favor technology. The tech-heavy Nasdaq Composite is back where it was at the peak of the 2000 bubble, but earnings growth, not multiple expansion, has been the main driver of the advance. At 30 times trailing earnings, the price-to-earnings ratio on the Nasdaq has not changed much over the past two years and is still a long way from the 175 times earnings that marked the top in 2000.

Investors who are overweight U.S. equities may want to consider decreasing that overweight and taking another look at international stocks. Even with the recent rally, the U.S. is still up only (?) 2.5% year-to-date versus 18% and 12% (in local currency terms), respectively, for Europe and Japan.

That said, we’d once again offer an important caveat: Expect volatility to continue and to be high. While U.S. stocks have managed to advance so far this year, the volatility of daily returns is already 25% higher than it was last year. Expect a continued bumpy ride in the months ahead.

Source: Bloomberg.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.

 

 

This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular. 

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