BlackRock's Koesterich: Expect madness in March

There is trouble 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 problems remain the same. The stock market was shaken early last week by Italy's murky election results and the looming sequestration. This new rush of uncertainty has Russ Koesterich, chief investment strategist at BlackRock Inc., thinking about ways that advisers can prepare their portfolios for what likely will 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. “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,” he said. One suggestion for wary financial advisers is 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 last Tuesday, its worst day this year, the yield on 10-year Treasuries fell to 1.86%, from 2%. Advisers can do better than plain-vanilla Treasuries, Mr. Koesterich said. He suggests using Treasury inflation-protected securities, which haven't been as susceptible to risk-on/risk-off trading swings as the 10-year note. Mr. Koesterich also advocates 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. Historically, they have traded at an average discount of about 20%.