Take a cautious approach

Q. Where do you see the markets heading the rest of the year, and are there any stock sectors you like best for the next few quarters -- if not years? Any specific names?

A. The weight of evidence warrants a conservative approach at this point in the market cycle. Our concerns surround expectations for slower earnings growth, geopolitical developments, a risk the Fed will continue on its tightening path longer than currently anticipated, and the impact high debt levels and a slowing housing market will have on consumer spending.

Within the U.S. equity market, we favor stable-growers, such as health-care stocks, due to attractive valuations. We suggest avoiding areas exposed to a slowdown in housing and consumer spending, such as the consumer discretionary sector.

Investors should watch patiently for opportunities that are likely to emerge through the course of the year. One such opportunity that should be presented surrounds high quality U.S. growth stocks. After over five years of poor performance, many world-class companies are selling at average prices today. Examples of such companies include: Applied Materials (Ticker: AMAT), Sysco (SYY), Anheuser-Busch (BUD), Zimmer Holdings (ZMH), Johnson & Johnson (JNJ) and Medtronic (MDT).

Q. Where would you advise a person with an extra $10,000 to $20,000 invest their money if they don't plan on using it or needing it for at least 10 years?

A. Despite strong performance in recent years, we continue to see the best long-term growth opportunities in overseas markets. We still expect to see a multiyear period of outperformance for Japanese stocks due to ongoing structural reform, growth in China, improved domestic consumption, corporate profitability and increased capital flows. For exposure to Japan, we suggest the T Rowe Price Japan Fund (PRJPX), while broader overseas equity exposure can be found through EuroPacific Growth (AEPGX) and Julius Baer International Equity (BJBIX). While the asset class is due for a correction, any setback this year would provide an excellent opportunity in emerging markets, where we suggest investors consider New World (NEWFX).

Q. What is the best way for savers to take advantage of rising interest rates?

A. Within the bond market, we see the entire yield curve shifting higher as short-term rates move up. Our fixed-income strategy favors bonds with high coupons and call features. Agency bonds with step-up coupon features provide protection from rising rates, while longer-term municipal bonds are attractive due to an abnormally narrow yield spreads to taxable bonds. We expect corporate credit spreads to widen, increasing risks in lower quality junk bonds.

Within the equity market, rising rates has historically increased risks and volatility. Flexible investment managers should help mitigate such risks and enhance total returns over index funds in the current low-return environment. In addition, large cap stocks will tend to hold up better under interest rate pressures than small caps.