Stocks typically do all right when the Fed is hiking, but it is hiking in a low-growth environment and stock market gains should also be muted, he said. "Pretty, pretty low returns again for 2016," he said. "If it's mid-single digits you'll be lucky."
Koesterich released the BlackRock list for 2016, and on it he notes that there will be some of the same themes that dominated 2015. Volatility will be a factor as markets focus on the activities of central banks. The Fed in December raised its fed funds rate by a quarter-point after seven years at zero, and it forecasts four more hikes this year.
"The Fed is likely to continue to raise rates but we think it's going to be a measured process," he said. "I don't think rising rates by itself is the biggest challenge for the market. The Fed is raising rates at a time when other central banks are easing. The risk is that the dollar gets too strong. The dollar too strong is a bigger risk for stocks than the extra quarter point the Fed might go."
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The double whammy of a rising dollar and weak energy bit into earnings in 2015, but Koesterich said those two forces should dissipate in 2016.
"Energy has already collapsed. It can collapse further, but we think most of the damage has been already inflicted," he said. "It should be a better year for corporate earnings than it was last year. You're probably going to see a bit of margin pressure which is something that is more of an issue here than in Europe or Japan."
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Koesterich released his forecast Monday, as a weak Chinese manufacturing report kicked off a global stock market rout. Koesterich expects China to continue to be a source of angst for markets.
"China, I think, is one of the risks to the global economy. I don't think the sell-off of the Chinese stock market is fundamental for U.S. investors, but it clearly affects sentiment. It's one of the things that's going to erupt over the next couple of years, as the economy transitions. It's going to be more a source of volatility than one that mitigates it," he said.
Koesterich said the U.S. economy is doing all right, and the sluggish numbers do not tell the whole story.
"The manufacturing sector in many countries is struggling," he said. "The service sector is generally doing much better." He said there's downward pressure on goods inflation but in services, inflation is firming. ISM manufacturing data fell to 48.2, signaling contraction.
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"Be more tactical in the U.S. market. Be more specific in parts of the Treasury curve you like," he said, noting investors should have fewer bonds than normal. He favors TIPs and municipal bonds currently.
Koesterich also said there could be a return of political risk in 2016, and he pointed to the U.K. vote on whether to stay in the European Union as a risk not just for Europe but Britain. An exit could invite another Scottish referendum to split from the U.K.