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Hi, I’m Carolyn Barnette, Head of BlackRock’s Market and Portfolio Insights for U.S. Wealth team, and I’m here with your Advisor Outlook update for November.
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Slide 3: November key takeaways
Well, fall has been a busy month for investors so far, and I have a few things in particular to note:
First and foremost, we saw bond markets surprise investors by actually losing money following the Fed’s 50 bp rate cut in September; and then we also saw a host economic data surprise to the upside, effectively taking recession concerns off the table; and then third, Equity markets continue to rally, and broader performance across styles and sectors make us more optimistic for continued market upside.
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Slide 4: falling cash rates, but rising bond yields
Now, let’s start by talking about bonds, since this has really been a painful surprise for many. Ordinarily, when the Federal Reserve cuts interest rates, you’d expect yields to fall, and bond prices to rise. Or at least, you might expect no change to longer-term bond yields at all, since they tend to be less sensitive to cash rates.
But you certainly wouldn’t expect the 10Y treasury to rise by 65 bps, which is what it did between September 17th and October 30th.
And if you’re wondering why, you’re not alone. It’s one of the top questions we’ve gotten, and there are two reasons behind this:
First, markets may have previously been pricing in too many cuts from the Federal Reserve… and with economic data surprising to the upside, it now seems like the Fed may not need to cut rates as quickly or deeply as markets had been pricing.
And second, many projections show U.S. deficits increasing, which could put additional pressure on longer-term bond yields. The U.S. is probably going to need to issue additional debt to support the deficit, which could potentially drive up the term premium that investors demand to buy longer-term bonds. This is one of the reasons that we’ve been underweight long-term bonds across our fundamental and systematic fixed income platforms.
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Slide 5: upside surprises take recession off the table
But on the bright side, what’s bad for bonds has been good for stocks: upside surprises seem to have taken recession off the table. Economic surprise indexes recently returned to positive territory, on the backs of big upside surprises such as September’s nonfarm payrolls report and retail sales. The U.S. consumer has continued to spend, culminating in a 2.8% real GDP growth figure for Q3 – well north of the sub-zero recession indicator.
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Slide 6: performance continues to broaden out
And in further good news for stocks, we’ve seen performance broaden out from this year’s early winners. While large cap growth and tech companies had been driving markets higher in the first half of the year, value and small caps have been catching up in the second half… a figure illustrated most starkly, perhaps, by the difference in tech and utilities stock returns in each half: technology stocks returned 28% in the first half of the year, but just 1% between July 1st and October 30th. And utilities delivered a mirror experience: 9% in the first half of the year, not too shabby, but almost 19% in the second half through October 30th.
While we’ve certainly seen equity markets bounce around in recent days, we are optimistic going forward, particularly once election uncertainty dies down.
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Slide 7: Our best portfolio implementation ideas for today
Now if you’re wondering what to do with all of that, here are some thoughts.
First – while we’re optimistic about equities, and see opportunity in the broadening markets, we’re still sticking to our overweight to large caps over small. And here’s why: high valuations and heightened geopolitical risk make us more comfortable with the higher quality, more resilient large cap names. And even though the Fed has started cutting, we’re not out of the woods on interest rates yet either – they’re still pretty high, and they’ll continue to have a restrictive effect on companies borrowing at today’s rates. We continue to like quality as a factor, and are also seeing opportunity in value stocks.
Second – seek out balance in bonds. Yields have risen, which is making treasuries cheaper. Now could be a time to extend out into the belly of the curve… both for the higher yields today and as potential ballast in a risk-off scenario. We also like complementing those higher quality bonds with flexible bond strategies that can be selective with curve positioning and credit selection. Credit exposure can offset some of the high interest rate volatility we’re seeing today as well, potentially smoothing out the ride while also driving higher income.
And last, don’t forget about alternatives as you’re seeking balance inside of your portfolio. With longer-term bonds still under-yielding cash and credit spreads relatively tight, “cash plus” alternatives may be able to offer diversification with a higher potential spread over cash. Private markets can also help amplify returns for those who have the liquidity budget available.
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Slide 22: 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!
