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Koesterich on markets: Expect some madness in March

BlackRock strategist gives tips on preparing portfolios for a volatile month; different year, same problems

Feb 26, 2013 @ 4:47 pm

By Jason Kephart

Investments, volatility, portfolio strategy
+ Zoom
(Bloomberg)

There is trouble overseas in the eurozone, and here at home, Congress is busy squabbling over the deficit.

No, this isn't a reprinted article from 2011, but the key players and key problems remain the same.

The stock market was shaken this week by Italy's murky election results, and the sequestration, which calls for $85 billion in federal spending cuts, is due to go into effect Friday unless Congress reaches some kind of deal.

This new influx of uncertainty has Russ Koesterich, chief investment strategist at BlackRock Inc., thinking about ways that advisers can prepare their portfolios for what will likely be a volatile March.

'We've had a nice rally to start the year. It's not unreasonable to give some of that back,” Mr. Koesterich said.

“Next month, we're going to have to deal with some old problems,” he said. “We're not facing risks like in 2008 or 2011, but Europe still has a lot of issues to resolve, and the U.S. deficit is far from fixed.”

One area that volatility-wary financial advisers should be looking is at Treasuries, Mr. Koesterich said.

“No one believes Treasuries are a particularly good value; they may even be a bad value, but they still do one thing for a portfolio, and that's diversify it,” he said. “It's going to respond differently to things like stocks and high-yield bonds when there's a threat to the economy.”

Indeed, when the Dow Jones Industrial Average fell 216 points Tuesday, its worst day this year so far, the 10-year Treasury's yield fell to 1.86%, from 2%. Bond yields fall as prices rise.

Advisers can do better than vanilla Treasuries, Mr. Koesterich said.

He suggests using Treasury inflation-protected securities, which haven't been as susceptible to the risk-on/risk-off trade as the 10-year and therefore are less volatile.

Mr. Koesterich also advocates for a larger exposure to investment-grade corporate bonds and municipal bonds, which also have been less volatile than the broad Treasury market.

On the stock side of the portfolio, he warns against overloading on classic defensive sectors such as consumer staples and utilities because they are expensive at the moment.

Utilities, for example, are trading at about a 7% premium to the market today. Historically, they have traded at an average discount of about 20%.

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