Russ Koesterich, CFA, JD, Managing Director and portfolio manager for BlackRock's Global Allocation Fund, is a member of the Global Allocation team within BlackRock's Multi-Asset Strategies Group. He serves as a member of BlackRock's Americas Executive Committee. He is a frequent contributor to financials news media and the author of two books, including his most recent "The Ten Trillion Dollar Gamble."
Rena Sherbill (RS): As we enter 2018, are you bullish or bearish on US stocks?
Russ Koesterich, CFA (RK): We remain constructive on stocks and are overweight, particularly relative to bonds. We believe that stable growth, low inflation and still benign monetary conditions will support equities into the new year.
RS: Which domestic/global issue is most likely to adversely affect US markets in the coming year?
RK: With equity valuations already elevated, the key for U.S. stocks in 2018 will be earnings growth. Stocks will have a tailwind from what looks increasingly like a large corporate tax cut.
RS: How does the political climate affect the risks and opportunities for next year?
RK: It does not unless political uncertainty begins to impact the economy. The lesson from 2017 is that investors will look past political volatility if it does not impact the real economy.
RS: Do you expect the yield curve to continue flattening in 2018, and if so what impacts will that have on the equity market and the economy in general?
RK: We expect a modest backup in interest rates in 2018 but for the curve to stay flat relative to historical norms. A flat curve does not necessarily have the same significance, ie, a pre-cursor to a recession, as it has in the past given the numerous secular factors containing long-term rates.
RS: What do you expect to be the key driver of stock market performance in 2018?
RK: Earnings growth.
RS: Will the transition in Federal Reserve leadership from Yellen to Powell impact equity investing sentiment? Why or why not?
RK: Absent an unexpected acceleration in inflation, which we do not expect, we expect policy to remain consistent into 2018, despite the change in Fed leadership.
RS: What issue is receiving too much investor attention and/or already priced in?
RK: Change in Fed balance sheet.
RS: What do you see for emerging markets in 2017?
RK: We are constructive for both EM equities and debt in 2018. Solid global growth and a range bound dollar are likely to continue to support this asset class.
RS: What 'surprise' do you see in the market that isn't currently getting sufficient investor attention?
RK: Secular changes in the economy, such as the continued disintermediation in financial services, impact of cloud computing and the shift from brick-and-mortar to on-line shopping. While hardly a new phenomenon, we believe the impact is under appreciated.
RS: In terms of asset allocation, how are you positioned heading into the New Year?
RK: Overweight equities, particularly non-U.S. developed markets, overweight EM debt, while being underweight non-U.S. sovereign debt.
RS: Any additional considerations you'd like to share with readers as they ponder their investing strategy in 2018 and beyond?
RK: Watch credit markets as the key for whether the bull market will continue. If credit spreads, particularly high yield, remain tight this is bullish for stocks and suggests the low volatility environment can continue.