Investors should enjoy the current stock market calm because it's about to come to an end, cautions Russ Koesterich, chief investment strategist at BlackRock.
Even if volatility fireworks are ahead though, he advises there could be opportunities to buy U.S. small caps, as well as Japanese and Chinese stocks.
"Although seasonal strength may keep volatility below normal for the remainder of the year, the situation is likely to change in 2015. A shift in U.S. monetary policy next year (i.e., Fed action to raise short-term interest rates) could lead to spikes in volatility of the type we witnessed in September and October," he wrote on the BlackRock blog
Koesterich noted that last week, the S&P 500 rose or fell less than 0.1 percent for four consecutive days — the longest stretch of such remarkable volatility in 25 years. He called it a "temporary phenomenon."
In the meantime, Koesterich said he is taking a more favorable view of U.S. small caps. "After dramatically underperforming year-to-date, we are starting to see some shift in sentiment. We had been advocating an underweight to U.S. small caps all year, but would now favor a more neutral stance," he wrote.
Koesterich also likes the prospects for stocks in Japan and China. He mentioned good earnings and a weaker yen as support for equities in Japan. In China, he said more open access to stocks trading on the Shanghai exchange, a new development, should give foreign investors access to $2 trillion in Chinese equities, which could be supportive of stocks there.
Among other financial assets, Koesterich is not optimistic about gold for the time being.
"While volatility in stocks and bonds is down, it is picking up for commodities," he noted. Weighing against gold, he said, are a strong dollar, the prospect for rising real interest rates and falling inflation expectations.
The Financial Post
noted that more stock market volatility is ahead globally, not just in the U.S. The Canadian newspaper predicted more stimulus measures from the Bank of Japan and European Central Bank while the Fed tightens are likely to be uncoordinated, and thus could create more ups and downs and a less uniform environment for equities.
"This is the first time in the post-financial crisis period that policy is diverging among the world's major central banks," Tyler Mordy, co-CIO at Hahn Investment Stewards in Toronto, told the Post. "But central banking is more than just liquidity. Ultimately, it is a confidence game and animal spirits can be crushed very quickly if the market interprets shifting winds."
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