What to Know, What to Do

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2 0 1 5 S p r i n g u p D a t e

While events are playing out largely as we expected so far in 2015, markets are dynamic and deserving of constant examination. With that in mind, we are pleased to present the Spring Update to our 2015 Outlook: The BlackRock List.

2015 Spring Update

Central Bank DivergenCe in Full Swing

FeD reaDy to hikeBut rateS to remain low

u.S. eConomy: inChing up, not Breaking out

inFlation: Still lowin Some plaCeS, too low

expeCt StoCkS Bumpy riDe to Continue

5 Things to Know

5 Things to Do

preFer StoCkS over BonDS, But Be ChooSy

look overSeaS For opportunitieS

watCh your Step in BonDS

reSiSt the urge to exit

Seek growth in a low-growth worlD

2 0 1 5 o u t l o o K : s p R i n g u p D a t e

centRal BanK DiveRgence in Full sWing

As the U.S. Fed has signaled it will likely raise interest rates later this year, central banks in Europe and Japan have done the oppositeembarking on ambitious easing efforts. This divergence has led to a strengthening of the dollar versus other currencies and historically low yields overseas. This has long-term U.S. bonds looking comparatively attractive, propping up their prices and keeping yields low.

FeD ReaDy to hiKe But Rates to Remain loW

Its been half a generation since the Fed raised its short-term interest rate target. Many investors wont recall what rate tightening feels like; others have never seen it. Regardless, this time is different. In 2006, the Fed lifted the target rate from 5% to 5.25%. This time it will move from zero to still very low. While Fed liftoff will have some impact, it may be less than many expect.

u.s. economy: inching up, not BReaKing out

The U.S. economy is weaker than many expected heading into the year. A key culprit is the stronger dollar, which has created a headwind for many large U.S. companies that depend on exports, making their products more expensive (and less competitive) overseas. One economic bright spot: the labor market (minus a disturbingly low labor participation rate).

inFlation: still loW in some places, too loW

U.S. inflation remains low due to a host of short- and long-term factors. The short term: collapsing energy prices, a strong dollar and low demand for products, which is squelching wage growth. The key long-term factors: technological innovation and aging populations. U.S. inflation is at a comfortable Goldilocks point: not too hot and not too cold. But outside the U.S., particularly in Europe, inflation is too low, veering perilously close to deflation. This has been a major incentive for the European Central Banks (ECBs) easing measures.

expect stocKs Bumpy RiDe to continue

The unusual calm stock investors enjoyed from 2012 to late 2014 has slipped away. The daily volatility of returns in 2015 is already 25% higher than it was in 2014. However, current readings are actually more in line with the long-term trend. Investors should expect a continued bumpy ride. The good news is that conditions are still broadly supportive of stocks and any corrections arent likely to be too severeand may present buying opportunities.

Ke y taKe aWaysShort-term bonds will be most affected by higher rates, while longer-term yields should inch up at a gentler pace. Stocks may see brief stutters, but should recover.

The U.S. is still stronger than other developed economies. We expect growth in the area of 2.5% to 2.75% this yearenough to support modest growth in stocks.

Tepid U.S. inflation is good news for American businesses and consumers. Ultra-low inflation in Europe should lead to continued stock-friendly policy from the ECB.

While volatility will be higher than the unusually low levels of the past few years, market dips may present buying opportunities for long- term investors.

We expect divergence to continue for at least the next several months. Continued dollar strength will exert downward pressure on commodities, inflation and the earnings of U.S. exporters.

pReFeR stocKs oveR BonDs, But Be choosy

U.S. stocks are seeing modest returns so far this year. That should come as no surprise, given the headwinds they face: a strong dollar affecting earnings for exporters, still sluggish consumer spending, and economic data below expectations. Adding to those challenges, U.S. stock prices, while not in a bubble, are expensive, especially relative to other developed markets.

Still, we continue to favor stocks over bonds, which are even more expensive, and cash, which offers near-zero returns. In the U.S., we are particularly cautious on segments of the stock market that are most affected when interest rates go up, such as utilities. Greater value can be found in sectors positioned to benefit from economic growth, such as technology.

looK oveRseas FoR oppoRtunities

For the last several years, U.S. stocks have generally been the place to invest, outperforming the rest of the world. For many U.S. investors, this has reinforced a natural bias toward U.S. equities over international alternatives. But this year has served as a reminder of why it makes sense to include international stocks in your portfolio. Year-to-date, stocks in Europe and Japan are up 18% and 12%, respectively, while the U.S. is up roughly 2% (all in local currency terms).

We believe this trend will continue, given the attractiveness of European and Japanese stocks versus pricier U.S. equities, as well as the market-friendly central bank easing in those countries. We believe increasing international exposure makes sense in general, but even more so these days.

Watch youR step in BonDs

Navigating the fixed income markets remains a challenge. The expected Fed rate hike is already causing shorter-term bond yields to rise sharply. And with yields still low for longer maturities, we see few bargains for buyers of bonds. That said, we do see some opportunities in the high yield sector, and municipal bonds look attractive, especially longer maturities.

We suggest investors look to funds that can deftly navigate rate-sensitive parts of the bond market, such as a flexible, go-anywhere bond portfolio, or to segment-specific exchange traded funds (ETFs) that may do well in a rising-rate environment. But our main suggestion is this: Tread carefully and know what you own.

Resist the uRge to exit

Higher volatility, fears of a bubble, concerns over what the Fed may doall of these are reason enough for nervous investors to head for the exits. But avoiding the markets can cost you over time. In addition, our research shows investors are already overallocated to cash (and they know it). For the most part, they hold cash out of an abundance of caution.

But remember: While cash wont fluctuate in value like stocks and bonds, historically it has provided negative returns when you factor in inflation and taxes. One suggestion for wary investors is a broadly diversified global multi-asset strategy that seeks equity-like return without all the volatility.

seeK gRoWth in a loW-gRoWth WoRlD

Growth is slow but respectable in the U.S.; however, that is not the case everywhere. Whats an investor to do in a low-growth world where many traditional assets are looking pricey? Cast a wider net in pursuit of your financial goals. International stocks (including emerging markets), infrastructure and real estate can add growth to a portfolio. You might even consider alternative investments. These additions can help diversify a portfolio while providing greater growth opportunities.

Diversification doesnt guarantee profits or prevent loss (nothing does), but it does allow you to spread your risk across a broader set of instruments that may respond differently to a given set of market conditions. And in a world that still offers little in the way of screaming opportunities, mixing it up may be one of the best things you can do.

Ke y taKe aWaysWe believe U.S. stocks can climb higher, albeit at a muted pace.

International investing comes with risks, including the potential for higher volatility. But is also presents compelling opportunity today: Attractive prices (and thus higher growth potential) relative to U.S. stocks.

With rising interest rates, bond principal is at risk. Be wary of shorter maturities in particular, which would be most affected by a Fed rate hike.

Its important to hold some cash, but too much can set you back. Cash comes with a cost after inflation and taxes.

Equip your portfolio with differentiated sources of risk and return.

What to Know

What to Do

Not FDIC Insured May Lose Value No Bank Guarantee

The stated investment preferences are the opinions of the author and do not reflect individual investors risk and return goals. Individual investors should consult with their financial professional about how to implement these opinions in a portfolio that is suitable for their goals and risk tolerance. These views do not necessarily reflect the investment decisions made within specific BlackRock portfolios. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 10, 2015, and may change as subsequent conditions vary. Individual portfolio managers for BlackRock may have opinions and/or make investment decisions that, in certain respects, may not be consistent with the information contained in this report. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

Investment involves risks. Stock and bond values fluctuate in price so that the value of an investment can go down depending on market conditions. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are typically heightened for investments in emerging markets. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income from municipal securities may be taxable.

You should consider the investment objectives, risks, charges and expenses of iShares and BlackRock mutual funds carefully before investing. The prospectuses and, if available, the summary prospectuses contain this and other information about the funds and are available, along with information on other BlackRock funds, by visiting blackrock.com/funds or ishares.com. The prospectuses and, if available, the summary prospectuses should be read carefully before investing.Buying and selling shares of iShares Funds will result in brokerage commissions. The BlackRock mutual funds and iShares Funds are distributed by BlackRock Investments, LLC, member FINRA.

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ruSS koeSteriCh Global Chief Investment Strategist

Russ Koesterich, CFA, Managing Director, is BlackRocks Global Chief Investment Strategist. He is a founding member of the BlackRock Investment Institute, delivering BlackRocks insights on global investment issues. Russ is a prolific commentator on the markets and is regularly featured in the print and broadcast media.

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