BlackRock’s Monthly Market Outlook for Financial Advisors

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Hi, I’m Carolyn Barnette, Head of BlackRock’s Market and Portfolio Insights for U.S. Wealth team, here with your August Advisor Outlook update. 

This is going to be a fun one – we saw a lot of things change in July, starting with a soft inflation print that sent rates falling and small caps rallying on the expectation that the Fed will actually be able to start cutting rates later this year. 

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Slide 4: Decelerating inflation suggests Fed cuts

Let’s start with inflation: we saw the second softer-than-expected inflation print in a row when June’s headline CPI number came in at just 3%... and, importantly, we saw shelter costs come down in a big way as well. Shelter is 36% of the overall inflation calculation, so a continued decline there could get us very close to the Fed’s target.

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Slide 5: Multiple 2024 cuts now back on the table

Markets reacted almost immediately to this decelerating inflation… with futures markets now pricing in a 100% likelihood of at least one rate cut in September, and a 75% likelihood of at least three cuts by the end of the year. Chair Powell, in his July press conference, seemed very open to open to cutting rates in September, noting that the risks to inflation and unemployment are now more evenly balanced… and that the Fed is attentive to the risks to both sides of its dual mandate.

We’ve seen bond yields move in a big way, particularly in the front and belly of the curve. The 2Y and 5Y have both now dropped 60 bps since the end of May, while the 10 year has dropped close to 50. The Agg Bond index is now firmly in positive returns territory for the year, after rising 2.4% in July… and while duration has… to put it lightly… been uncomfortable to own at times over the last few years, rising confidence that the Fed will actually cut has made extending duration more comfortable. 

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Slide 6: Declining inflation makes real rates more restrictive

While Fed cuts of any magnitude should be good for stocks and bonds, we believe that rates will remain in restrictive territory even if the Fed does cut three times this year. The Fed hasn’t raised rates since last July, but real rates have steadily climbed higher as inflation has fallen… which should continue to put pressure on the smaller companies that are more sensitive to high rates.

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Slide 7: Significant market broadening post-CPI

Now, those small companies rallied in a big way in July… while they lagged large caps by 13.5% in the first half of the year, they rallied by about 10% in July, handily outperforming their larger cap brethren. 

We saw sector performance broaden out as well, with value stocks also rallying at the same time that growth stocks fell on fears around the cost of AI-related capex spending.

We’re still in the middle of Q2 earnings season, so it remains to be seen what’s next for these companies: we remain cautious on small caps, on concerns that slowing growth and still-restrictive rates could continue to weigh on lower quality names, and continue to be optimistic about the growth potential of companies across the AI tech stack.

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Slide 3: August key takeaways 
To sum up:
Three big things to be aware of going into August:
1- First, rate cuts are likely in September. Decelerating inflation, in concert with moderating economic growth, makes Fed cuts more likely, with up to three cuts potentially on the table in 2024. These maintenance cuts should support both stocks and bonds, with the shape of the yield curve suggesting an overweight to the belly.
2- Rates may remain restrictive even with Fed cuts, which suggests continued overweights to quality equities and ‘cash plus’ diversifying alternatives.
3- And last, markets broadened out post-CPI. Small caps rallied following the second soft inflation print in a row; but, still-restrictive rates and slowing growth may disproportionately impact those companies. We are not chasing this rally, but instead keeping an eye on earnings.

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Slide 8: Our best portfolio implementation ideas for today

So when you put it all together, here are our best portfolio implementation ideas for today’s environment.

Expected rate cuts have supported high quality duration in the belly of the curve. We continue to like this part of the curve as a ‘happy medium’ that allows you to benefit from falling rates without all the volatility of the long end. We also continue to like the yield on a diversified, risk-aware basket of ‘plus’ sector bonds to complement that high quality rate exposure.
Still-high rates should continue to support ‘cash plus’ alternatives that earn the cash rate on their collateral in addition to any alpha they’re able to drive… and we like that many of these alts have been able to deliver attractive returns with low correlations to stocks and bonds.
We also believe that still-restrictive weights suggest a continued overweight to the large quality U.S. stocks that have remained resilient to high rates and should stay strong if growth moderates further.
And last, while the market broadening in July certainly favored small caps, we are watching earnings for signs that the rally can last. We are skeptical for now, and continue to favor tech+, AI, and private equity in seeking outsized growth opportunities.

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Slide 18: Navigate uncertainty with BlackRock

Check out the full Advisor Outlook deck for more of our best thinking, and if you have any questions or want to talk about what any of these ideas mean for you, please reach out to your local BlackRock market team or call (877) ASK-1BLK. Thank you!