Key takeaways:
- We believe the next Fed move is more likely to be a cut than a hike, but our near-term expectation is for the Fed to hold policy rates steady until late 2024.
- Our best advice for investing in an election year? Stay invested and keep politics out of your portfolio.
- Large quality companies may continue to dominate stock market returns, at least as long as restrictive interest rate policy continues.
I recently hosted BlackRock’s “In the Know” webinar, where we help advisors translate what’s happening in markets into actionable portfolio implications.
The discussion centered around the top three questions we’re getting from advisors:
- What’s next for the Fed?
- How might this year’s elections impact portfolios?
- When will markets broaden out?
Before getting to their top questions, we polled advisors on their current positioning. The most interesting insight? Cash allocations appear to finally be retreating, and advisors are almost evenly split between considering adding to equities (34%) and adding to alternatives (34%), with a smaller portion considering adding to bonds (28%) or cash (4%) over the next three months.1
Advisor cash allocations appear to be coming down
“In the Know” poll responses, 5/30/24 vs. 1/11/24.
Source: BlackRock “In the Know” virtual event polling. January poll included 1,343 responses on 1/11/24 and May poll included 628 responses on 5/30/24 to the question “How much cash are you holding your portfolios on average?”
Despite diminishing enthusiasm for bonds – 31% of advisors reported feeling optimistic about bonds in May, down from 61% in January – 51% are considering extending duration over the next three months.2
Read on for additional insights from “In the Know.”
What’s next for the Fed and interest rates?
Inflation still remains stubbornly high, but there are some positive signs of improvement in services inflation.
– Gargi Chaudhuri, Chief Investment and Portfolio Strategist, Americas
Inflation appears to be decelerating, but is still higher than the Fed’s target rate… and when you couple that with a U.S. economy that is still growing at a healthy rate, there’s not a lot of pressure to cut prematurely.
Markets are currently pricing in 1-2 cuts beginning later this year, with the highest odds of a hike in September or November. This seems reasonable, pending the path of inflation: a meaningful deceleration could prompt the Fed to cut as early as July, while a big uptick could spur the Fed to hold for longer or even hike.
I think the base case now is between 1 and 2 cuts - September depends on the next few inflation prints while December looks more certain given what the FOMC knows right now.
– Jeff Rosenberg, co-lead portfolio manager, Systematic Multi Strategy Fund
How to approach investing in an election year?
If you only invest when your preferred party is in office, you interrupt the magic of compounded annual returns in stocks that can have a major impact on your overall outcome.
– Mark Peterson, Director of Investor Strategy & Education
Elections have historically had a fairly muted impact on markets. Out of the 24 election years since 1926, stocks have only lost money in four of them… and when they’ve lost money, there have also been significant extraneous events (e.g., the 2007-2008 financial crisis).
That doesn’t necessarily mean there won’t be tactical ways to play the election – only that you shouldn’t lose sight of your strategic asset allocations. Those who let election anxiety or party biases spook them out of markets have tended to regret it.
When will markets broaden out ?
I would get and stay long the AI and AI derivative themes. I’d use moments of pullback, frankly, to add to that.
– Kate Moore, Head of Thematic Equity for Global Allocation
We continue to be overweight equities in the face of resilient growth, with a preference for the high quality companies that have the strong balance sheets to withstand restrictive interest rate policy. And although we’ve already seen quite a run-up in AI names, we continue to see opportunity in that part of the market.
Interestingly, the average advisor is underweight this part of the market, and instead, overweight small caps. One unintended consequence of being overweight small caps is being underweight technology, since technology makes up a much bigger portion of the large cap universe than small.
The average advisor is underweight large growth… and overweight small caps, resulting in an underweight to tech+
Average advisor portfolio weights vs. blended benchmark of 75% S&P Total Market Index and 25% MSCI ACWI ex U.S. IMI
Source: BlackRock, Morningstar as of 3/31. Analysis of 20,591 unique models collected by BlackRock over the 12 months ending 3/31/24. Benchmark is a blend of 75% S&P U.S. Total Market Index and 25% MSCI ACWI ex USA IMI Index. The portfolios analyzed represent a subset of the industry, and not its entirety. As such, there may be certain biases present in the data that reflect the advisors who choose to work with BlackRock to analyze their portfolios.
What’s next for advisors? Poll results from May 30th indicate that many are considering broadening their equity exposure over the next three months. The top area of interest? Value, followed closely by small caps or international equities.
Advisors mulling over broadening equity exposure
Poll results from 5/30 “In the Know” event
Source: BlackRock, In the Know event on 5/30/24. 654 respondents answered the question “What changes are you considering making to your stock portfolios over the next three months?”
Small cap underperformance has been persistent over the past ten years and it’s been rational. They have low profit margins. They’ve had high funding needs. They were most impacted by the pandemic…the financial leverage for small caps has increased to roughly 3x that of the broader market.
– Lisa O’Connor, Global Head of MPS & Deputy CIO for MASS Solutions
What does it all mean for the portfolio?
The Fed’s plans shift more than people think, and that means opportunities for investors.
– Alex Shingler, Co-Head of Income investing for MASS
With Fed policy expectations looking reasonable, it’s likely a good time to make sure you have an allocation to core bonds for when the Fed does actually pivot. Jeff Rosenberg prefers the belly of the curve to play this change, where rates potentially have the room to fall the furthest. We’re also taking advantage of high yields in short-dated bonds for the near-term: Alex Shingler called out CLOs as an area of particular interest, and Gargi Chaudhuri talked about high quality short duration.
Pressure on long-term rates may suggest additional forms of diversification, be they diversifying alternative strategies that seek ‘cash plus’ returns, options-based risk buffers, or commodities that can also act as inflation hedges. This might be the biggest gap for advisor portfolios: only 35% of advisor models analyzed include an allocation to alternatives. Those that do use alternatives increase their usage in models with higher allocations to fixed income, such that the average conservative model with at least one liquid alternatives strategy has a 20% allocation to alternatives.3
We aren’t yet adjusting portfolios for potential election outcomes, but are starting to think about the potential key policy implications of each presidential candidate. In the meantime, we see AI and growth as bigger drivers of market performance, and maintain our preference for stocks over bonds. Kate Moore and Lisa O’Connor both emphasized the importance of the AI theme, technology, and growth all being represented in portfolios, and Gargi Chaudhuri emphasized her preference for quality equities.
Looking for more insights from our panel of investment experts?
- For the latest from Gargi Chaudhuri, see her team’s iShares Spring Investment Directions, and look out for their mid-year outlook later this summer.
- Find Jeff Rosenberg's latest outlook here and learn more about the BlackRock Systematic team here.
- For Mark Peterson’s latest views, check out the Student of the Market page, including his 2024 election year special.
- Explore how Kate Moore and her team capture thematic views within their asset allocation strategies, and check out BlackRock’s Global Allocation models.
- Check out BlackRock’s Target Allocation portfolios and explore how Lisa O’Connor and her team design and manage asset allocation strategies.
- To learn about how Alex Shingler and his team design and manage income portfolios, check out BlackRock’s Multi-Asset Income page.
Look out for the full replay, and please reach out to your market team with questions or ideas for future events, or to further discuss what any of these ideas might mean for your portfolio.
Explore the Advisor Outlook – BlackRock’s monthly market outlook for financial advisors – for more details on our latest market and portfolio insights.
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