US Stocks the Best in Show This Year
U.S. stocks are having their best start to the year in more than a decade, well outperforming bonds, commodities, and global equities in the first half of 2013.
The S&P 500 is up more than 13 percent so far, seeing its greatest January to June rally since 1998 when it rose better than 16 percent.
Cheap money, strong corporate earnings, and a slowly improving economy have juiced the stock market as investors have poured money into stock mutual funds for 25 consecutive weeks, according to research firm Lipper. Stock mutual funds have raked in $113 billion this year.
(Read More: I Really Like Stocks, Gold at Its Worst: Gartman)
Even with stocks' strong showing in the first half, there's no clear 'Great Rotation' out of bonds and into stocks just yet. Although bond ETFs—corporate, municipal, and inflation-protected—are all down for the year, collapsing since May 1, when the U.S. 10-year Treasury yield hit a low of 1.61. Since then, the 10-year yield has jumped more than 50 percent as the Federal Reserve has warned that it may begin scaling back its bond-buying program before year end.
Since May 1:
"If yields rise, anything at the long end of the curve is going to plummet," cautioned Dave Nadig, President of ETF Analytics at IndexUniverse.
Bonds have stabilized in the final few days of the quarter, but with rates likely to rise in the second half of the year, investors should consider their options.
(Read More: Best First Half Since 1998. What Next?)
One way to protect against higher yields and falling bond prices is to move into short-term alternatives, analysts say. For instance, the iShares 1-3 Year Credit Bond Fund is down less than half a percent this year, while its long-term counterpart—the iShares 10 Year Credit Bond Fund—is down worse than 11 percent.
Bank loans or floating rate debt can also provide shelter from a downturn in bond prices. The PowerShares Senior Loan Portfolio represents a combination of institutional loans with floating interest rates. It is lower by about one percent this year, faring much better than the iShares 20 Year Treasury Bond ETF, which is off nine percent.
Emerging markets have also fallen victim to rising rates, seeing an exodus of investment since the start of May. Higher yields, and thus more expensive money, in a slow-growth environment spell trouble for emerging countries, which rely on foreign investment to prosper.
Stock Market Performance Since May 1:
The iShares Emerging Markets ETF has seen $9 billion in redemptions this year, the second most of all ETFs behind the SPDR Gold, which has registered redemptions of more than $18 billion. Commodity stocks, like gold and copper miners, have steadily declined since the beginning of 2013, while emerging markets have only recently sold off.
Rising rates typically signal an improving economy, which should boost the stock market. However, U.S. stock indices have been big beneficiaries of the Fed's stimulus program. For that reason, the Fed's comments that it could slowdown in the pace of bond purchases has rattled stocks in the past weeks. Since hitting a record high on May 22, the S&P 500 pulled back as much as 7.5 percent, but it is now only 4 percent off its best level.
Nadig expects the second half of 2013 will see increased volatility and flat returns across all asset classes as the end of stimulus nears.
(Read More: Buckle Up! Expect More Market Volatility This Year)
On the other hand, Dan Greenhaus, chief global strategist at BTIG, sees an upside for stocks in the second half.
"After the near-term turbulence shakes out, stocks will move higher," he said.
U.S. stocks have already seen a strong run this year, outperforming global equities and other major asset classes.
—By CNBC's Kristen Scholer