The first half of 2013 has treated stock investors well, particularly those who have kept their money at home in domestic holdings. Indeed, U.S. stocks returned approximately 13 percent during the first half of the year while the rest of the world has lagged well behind. For example, the average European blue-chip stock is down nearly 2 percent for the year and Emerging Market funds, those with investments in countries like China, Russia and Brazil, have been hit the hardest, down over 10 percent.

While the U.S. has definitely treated investors the kindest of all global markets so far this year, not all sectors in the U.S. have participated in the 2013 rally. Interest-sensitive sectors, which comprise high-yielding stocks that compete with bonds, like utilities and REITs (real estate investment trusts) have seen low double-digit losses on the year. Utilities, for example, have sold off nearly 11 percent since April and REITs have declined nearly 15 percent since May. Most utility stocks pay annual dividends in the 4 percent range, as do most REITs, so the decline has been somewhat offset by income, but the underperformance relative to the broad market has been extreme.

Bonds, no longer a safe haven?

The recent decline in interest-sensitive stocks has certainly been a result of the Federal Reserve’s indication that it may begin tapering its bond buying program (effectively scaling back its stimulus), which has caused interest rates to rise rapidly. Since bond prices decline as yields rise (inverse relationship) many bond owners have suffered losses this year. The easy explanation as to why prices drop when yields rise can be seen in a simple example— if a new bond is issued today at par with a 3 percent coupon, and you purchased the same/similar new issue when it was offered six months ago with a 2.5 percent coupon (rates were lower), your bond is now going to be less attractive to investors—and they’ll pay you a lower price than they are willing to pay for the new higher yielding bond. With rates rising in the first half of the year, long-term bond mutual funds have dropped 4 percent and even a portfolio mix of short-, medium- and long-term bonds has declined a couple percentage points. Still, despite the recent losses in bonds, my best guess tells me the uptick in rates will be short-lived and interest rates will decline yet again while prices recover somewhat. While I am not a big fan of bonds right now, given the fact that yields are still near all-time lows, they can play an important role in a portfolio by providing both income and stability. If you believe the U.S. economic picture will remain relatively weak, inflation subdued and the employment picture not all that rosy—then as a bond holder you will more than likely see prices rise yet again (yields drop), adding gains to the consistent stream of income provided by your holdings.

Real Estate Investment Trust declines are overdone

Real estate investment trusts have been battered so far in 2013 as investors have voted that the rise in interest rates is going to cool real estate prices and home building. The average rate for a 30-year mortgage has jumped to 4.5 percent from 3.4 percent just a couple months ago. Refinancing has dried up and home builders have seen their stocks plummet from recent highs as pretty much all real-estate related stocks have been hit. Given the decline, I view this asset class as fairly attractive for the short term, and I wouldn’t be the least bit surprised to see prices exceed the old highs recorded in May. Yet, it appears as if there may be another bubble brewing in real estate and I would not be comfortable buying and holding for the long term from present levels. Prices have simply moved too high and fast off the bottom in 2009 to warrant long-term purchases at these levels. And, if the Federal Reserve is truly going to cut back on its stimulus at some point in the next 6 months or so, and it is content to see interest rates rise, I imagine that would stall real estate prices and put a lid on any further gains.

Second half looks favorable

Despite the recent rise in interest rates, I still don’t view bonds as an attractive asset class at this time (2 or 3 percent return before taxes just doesn’t interest me). So, this leaves investors with only a couple asset classes to consider—stocks and real estate—for decent income and potential capital gain. My preference for the second half and moving into early 2014, would be to own dividend-paying, blue-chip stocks that still offer compelling value and a consistent dividend stream backed by a healthy balance sheet. I’d also favor dividend stocks that have exhibited less volatility than the overall market, especially since we appear to be in the late stages of a bull market. Still, I view the market as fairly valued (yes, the easy money has already been made) with still above-average upside over the next year or so. Having said that, if valuations become stretched and the market reaches new highs over the coming months, I will more than likely pare back my stock exposure for clients and protect gains. I do worry that despite an accommodative Federal Reserve, at some point the market will hit a level where prices are unsustainable and vulnerable to a correction or bear market (broad market decline of 10, 20 percent or more). If you have any experience owning stocks during the past 15 years or so, you should recognize that a decline of this magnitude is not unrealistic.

Still, despite my concerns and the strong run in prices we have seen since the lows in 2009, there are plenty of stocks that offer good value at current prices. Here are some holdings to consider:

Stocks for moderate growth and income