Weekly Commentary Overview

  • U.S. stocks ended last week essentially flat, although the S&P 500 Index did post another record close on Thursday.
  • Mergers-and-acquisitions (M&A) activity continues to support the U.S. stock market.
  • Paradoxically, another factor boosting stocks has been mixed economic data, which has alleviated concerns over an aggressive Federal Reserve (Fed) rate-hiking regime.
  • However, an autumn rate hike by the Fed and the resultant modestly higher rates are unlikely to be  a catastrophe for markets.
  • Still, liftoff by the Fed would mean that the safety blanket of ultra-accommodative monetary policy starts to be removed.
  • In contrast, most other countries can look forward to at least another year, maybe longer, of monetary accommodation.
  • Lower valuations and monetary accommodation suggest investors should consider raising their allocation  to non-U.S. equities. And as they do, U.S. investors should preferably gain that exposure via instruments that seek to hedge the foreign currency impact.

Stocks Eke Out Slight Gains

U.S. stocks ended last week essentially flat, although the S&P 500 Index did post another record close on Thursday. For the week, the S&P inched up 0.14% to 2,126, the Nasdaq Composite Index advanced 0.81% to 5,089, while the Dow Jones Industrial Average slipped 0.22% to 18,232. Meanwhile, the yield on the 10-year Treasury rose from 2.15% to 2.21%, as its price correspondingly fell.

We believe U.S. equities can continue to climb and post further gains before the end of the year. However, we also believe the best opportunities may reside outside the United States, which, in fact, has been the case so far this year.

Taper Tantrum II Ahead?

Mergers-and-acquisitions (M&A) activity continues to support the U.S. stock market. Last week brought the announcement of deals in retail (Ascena Retail Group to acquire Ann Inc., owner of Ann Taylor, among other brands), pharmaceuticals (Endo International to acquire Par Pharmaceutical) and health care (CVS to buy Omnicare).

Paradoxically, another factor boosting stocks has been mixed economic data, which has alleviated concerns over an aggressive Federal Reserve (Fed) rate-hiking regime.

Although stocks have clearly benefited from the Fed’s languid path to an initial rate hike, the market’s luck may not last. A fall rate hike is likely, particularly after April’s consumer inflation report released last week. Core inflation (which excludes food and energy) accelerated on the back of higher medical and rent costs, although the year-over-year drop in energy prices pushed headline inflation further into negative territory. As a result, two-year Treasury yields, the most sensitive to future Fed policy, reversed their recent downtrend and ended Friday at 0.61%, up nearly 10 basis points (0.10%) for the week.

An autumn rate hike by the Fed and the resultant modestly higher rates are unlikely to be a catastrophe for markets. Rates will be rising from a historically low level, the pace of future hikes will be measured and bull markets rarely end with a first rate hike.

Still, liftoff by the Fed would mean that the safety blanket of ultra-accommodative monetary policy starts to be removed. And as the market demonstrated in the spring of 2013, investors’ reaction to losing their safety blanket is roughly the same as most toddlers: A tantrum may, at least temporarily, ensue.

Lower valuations and monetary accommodation suggest investors should consider raising their allocation to non-U.S. equities.

Eyes Open for Opportunities Overseas

In contrast, most other countries can look forward to at least another year, maybe longer, of monetary accommodation. In Europe, recent comments suggest the European Central Bank (ECB) may front load its program of bond buying. This news helped to weaken the euro, which traded down to 1.10 from nearly 1.15 earlier in the week. A softer euro, a dovish central bank and lower German Bund yields helped push European equities up by nearly 3% (in euros) last week.

Japan offers a similar story, with the Bank of Japan committed to 80 trillion yen/year of asset purchases. This massive program has helped to push the yen down relative to the dollar. A weaker currency, paired with a significant surge in share buybacks, has allowed for strong earnings growth. Indeed, 30% of companies listed on the first section of the Tokyo Exchange reported record profits for the year, the largest percentage since 2006. Strong earnings growth, not multiple expansion, has been the key driver of the Japanese stock market, which last week rose to its highest level since 2007. The TOPIX Index is now up roughly 16% (in yen) year-to-date.

Even emerging markets (EMs), long the laggards of the global equity market, are turning. China has dominated the headlines and investor focus, but Korea, Poland, Hungary and Russia have also posted double-digit gains. The turnaround in EM performance has been accompanied by a reversal of fund flows. Last week, EM equity exchange traded funds garnered $1.2 billion in investor assets.

To be sure, lingering issues remain in international markets. Chinese equities have skyrocketed on the back of speculative buying locally and easy money policies. In Europe, Greece is a lingering problem and time is running out. A leaked International Monetary Fund (IMF) memo suggests that, without additional funds, the Greek government will not be able to make its June 5 IMF payment.

Still, lower valuations and monetary accommodation suggest investors should consider raising their allocation to non-U.S. equities. And as they do, U.S. investors should preferably gain that exposure via instruments that seek to hedge the foreign currency impact, as dollar strength means equity gains in local currency terms will be muted when translated back into U.S. dollars.

Muni Risks to Watch


Peter Hayes breaks down the key risks facing investors in the muni market today.

Market Perspectives

Our experts take a deep dive in analyzing the outlook for key sectors of the financial markets across an array of asset classes.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of May 26, 2015, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.

©2015 BlackRock, Inc. All rights reserved. BLACKROCK, iSHARES and SO WHAT DO I DO WITH MY MONEY are registered and unregistered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA

Not FDIC Insured | May Lose Value | No Bank Guarantee

USR — 6347