Playing it safe as volatility rises

Feb 15, 2018

After a long, smooth rally, investors are facing wild swings in the market, underscoring the importance of skilled risk management.

While many market pundits were calling for another year of positive stock returns in 2018, the magnitude of the January rally took most by surprise. The combined catalysts of healthy global growth and rising optimism around U.S. tax reform catapulted stocks higher, making one of the strongest starts to a year on record.

However, the recent spike in volatility highlights one of the potential market risks this year as higher interest rates have begun to weigh on investor sentiment. As bond yields move up, the relative value of other asset classes, including stocks, can become less compelling, causing their prices to move lower. A combination of better economic growth and higher inflation expectations, a less accommodative Federal Reserve and rising U.S. deficit spending are all reasons to expect higher interest rates. Investors also need to keep an eye on geopolitical risks, the impact of tightening financial conditions in China, and any deceleration from the robust levels of global economic activity.

The competing forces of solid underlying fundamentals and high asset prices are likely to persist through 2018. For investors, the big challenge lies in deciding which matters more. As we’ve stated over the past few months, our preference is to run a lower aggregate amount of risk in the BlackRock Multi-Asset Income Fund primarily due to less compelling valuations. Recognizing that spreads are rather tight across most credit fixed income sectors, we have marginally shifted exposure into equities where the upside versus downside risk appears to be more balanced. Furthermore, as interest rates have moved up, we’ve modestly increased duration to capitalize on more attractive yields and, despite recent rate-driven volatility, to serve as a buffer in the event of a growth-scare equity pullback.

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