Weekly Commentary Overview

  • Global stocks finished last week with solid gains, but after a week of wild gyrations.
  • Last week may be a prelude to what's to come, as we expect more episodes of volatility as we enter the new year.
  • An important driver of that volatility will be markets adjusting to less accommodative U.S. monetary conditions.
  • But on top of that, investors will continue to wrestle with several lingering geopolitical issues, particularly with respect to Russia.

Stocks Climb Higher in a Volatile Week

Global stocks finished last week with solid gains, but not without wild gyrations along the way. In the U.S., the Dow Jones Industrial Average climbed 3.03% to close the week at 17,804, the S&P 500 Index rose 3.40% to 2,070, and the Nasdaq Composite Index was up 2.40% to 4,765. Meanwhile, the yield on the 10-year Treasury inched up from 2.10% to 2.17%, as its price correspondingly fell.

Last week may be a prelude to what's to come, as we expect more episodes of volatility as we enter the new year. An important driver of that volatility will be markets adjusting to less accommodative U.S. monetary conditions. But on top of that, investors will continue to wrestle with several lingering geopolitical issues, particularly with respect to Russia.

U.S. Growth Provides a Tailwind for Stocks …

Despite the severe volatility last week, global equity markets, at least in the developed world, managed to finish with solid gains. Emerging markets performance was more mixed, underscoring our recommendation to be selective in this space. Notably, Chinese equities continued to outperform, up more than 5% last week.

Here at home, stocks were helped by more evidence of U.S. economic strength. Industrial production rose 1.3% last month and is now up 5.2% year-over-year, the fastest pace in almost four years.

The fact that the U.S. economy is entering 2015 with strong momentum should help company earnings growth, allowing stocks to move higher next year. And while valuations are not cheap, they are supported by low inflation and ultra-low bond yields. U.S. Treasury yields did rise a bit last week, but the general trend toward low global yields continues. Last week, 10-year German bund yields fell to Japan-like levels of 0.60%. Low yields mean investors will continue to look for opportunities in stocks, rather than bonds, which should support the equity market.

The drivers of the low-yield environment are falling inflation (contributing to low nominal gross domestic product), a lack of supply of bonds and shifting demographics. For its part, inflation remains low even in the U.S. despite decent economic activity. In November, the U.S. consumer price index fell 0.3%, the biggest one-month drop since 2008. The decline was largely driven by energy prices, but core inflation remains low at 1.7% year-over-year.

Short-term interest rates are likely to rise next year, but the lack of inflationary pressure is providing the Federal Reserve with considerable latitude as it considers raising rates. On Wednesday, the Fed issued a statement that slightly changed the language in its guidance with respect to rate hikes. The Fed added a new clause, indicating that it would be "patient before raising rates," a seemingly minor nuance that helped ease concerns of a sudden hike in rates.

Weekly Commentary Quote

While stocks continue to press higher, there's no denying the environment is changing.

… But Buckle Up for More Volatility

While stocks continue to press higher, there's no denying the environment is changing. Back in July, we suggested that as the date of a first Fed rate hike approached, market volatility was likely to rise from the unusually low levels that characterized 2013 and the first half of 2014. Indeed, since the summer, equity market gains have been accompanied by greater gyrations. Between Jan. 1 and the end of August, the average daily close on the VIX Index (a common measure of stock market volatility) was 13.5. The average has now risen to 15.5.

In addition to the expected shift in the monetary regime, the rise in volatility is also being driven by more unease overseas. One area of increasing concern, both politically and economically, is Russia.

Oil prices fell another 6% last week, and are now down roughly 45% year-to-date. Lower oil prices will help mitigate the global slowdown, but plunging oil prices are inflicting real harm on several emerging market countries, notably Venezuela and Russia. While the Russian market and currency stabilized by Friday, the Russian ruble had plunged earlier in the week, despite a massive interest rate hike by the Russian central bank. The rate hike was the largest single increase since 1998, when Russian rates soared past 100% and the government defaulted on its debt.

Given this history, there is growing concern that despite a current account surplus and relatively low levels of debt, the combined effect of lower oil prices and economic sanctions leaves the Russian market vulnerable to speculative pressures. In short, the worry is that an economic contraction morphs into a financial crisis in the country.

Piecing it all together, we end the year with a few key recommendations: Prefer stocks over bonds, but be selective; prepare for volatility and focus on assets where value offers some downside protection; finally, seek growth potential in select emerging markets, particularly in Asia.

Navigating Volatile Markets


Russ Koesterich offers his thoughts on the best ways for investors to protect portfolios against volatility in the market.

Investment Directions

In-depth market commentary, analysis and actionable investment ideas from BlackRock’s leading strategists.

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 Dec. 22, 2014, 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.

©2014 BlackRock, Inc. All rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, BUILD ON BLACKROCK, ALADDIN, iSHARES, iBONDS, iTHINKING, iSHARES CONNECT, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES, CoRI and the CoRI logo 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 — 5138