Our anchor in choppy markets
Market take
Weekly video_20241007
Natalie Gill
Opening frame: What’s driving markets? Market take
Camera frame
We stay risk-on heading into Q4, guided by a positive near-term macro picture.
Market choppiness shows why having an investment anchor is key.
Title slide: Our anchor in choppy markets
1: Leaning into risk
We think the market’s current pricing of deep rate cuts reflects misplaced expectations for a typical business cycle – not a world shaped by supply constraints.
We see recession fears as overblown. Employment is still rising, cooling inflation is allowing the Federal Reserve to cut interest rates, and growth is not slowing sharply.
2: Fixed income focus
In a supply-driven regime, long-term bonds don’t reliably buffer against risk asset volatility – as seen since the pandemic.
We find quality and income in European short-term credit on less tight spreads. We think European government bond yields better reflect our policy rate expectations than in the U.S.
3: Staying nimble
Globally, we stay nimble given the upcoming U.S. election, geopolitical flare-ups and major policy shifts.
For example, we trimmed our Japanese equity overweight due to the drag on earnings from a stronger yen and mixed policy signals from the Bank of Japan.
Outro: Here’s our Market take
We stay risk-on heading into Q4. We use our investment framework, based on understanding the new regime of supply constraints, as an anchor in volatile markets.
Closing frame: Read details: blackrock.com/weekly-commentary
Leaning into risk
We stay risk-on heading into Q4 due to a favorable near-term macro backdrop. Recently choppy markets show why having an investment anchor is key.
Market backdrop
U.S. stocks were flat last week. Two- and 10-year U.S. Treasury yields surged as markets scaled back rate cut expectations that we thought were overdone.
Week ahead
We monitor U.S. CPI out this week for signs inflation is still falling toward the Fed’s target. We see supply constraints adding to long-term inflation pressures.
Market narratives have flipped this year: from buzz over artificial intelligence (AI) to concerns about big tech spending, and from recession fears to comfort in the U.S. economy’s resilience. Our anchor in these choppy markets: viewing this as a world shaped by supply – not a typical business cycle. We stay risk-on as U.S. inflation cools, interest rates fall and growth eases slowly. We stay overweight U.S. stocks, go beyond tech within our AI theme and stay nimble in Japan’s and China’s stocks.
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Not a cyclical story
U.S. payroll growth, 2023-2024
Estimates are made with the benefit of hindsight and are only an approximation. Source: BlackRock Investment Institute, U.S. Bureau of Labor Statistics, with data from Haver Analytics, October 2024. Notes: The chart shows monthly changes in U.S. payroll employment, the three-month average of payroll gains and our estimate of “steady state” employment growth, where the level of employment keeps up with population growth, allowing for an expected decline in growth due to population aging.
Markets have swung sharply this year. AI buzz gave way to doubts over AI spending. In August, a rising unemployment rate in the U.S. sparked recession fears, spurring markets to expect rate cuts as deep as in past recessions. We said recession fears and such rate cut pricing were overdone. This is not a typical business cycle – it’s a world shaped by supply constraints. The recent rise in unemployment was not due to layoffs but rather elevated immigration expanding the labor supply. Employment growth is still robust, Friday’s job data confirmed. See the chart. The unemployment rate has fallen again and markets have somewhat scaled back Federal Reserve rate cut expectations. Wage growth has cooled, bringing down inflation. Yet that might not last: Immigration will likely fall to its historical level – and no longer offset the decline in the workforce from population aging. That could push up inflation again.
Demographic divergence is one of five mega forces, or structural shifts, we see adding to inflation pressures and macro uncertainty in the long term. Yet the near-term macro picture presents reasons to keep leaning into risk. Cooling inflation has allowed the Fed to cut rates, and growth is not slowing sharply. We see this resilience reflected in corporate earnings strength expanding beyond the tech sector and stay overweight U.S. stocks on a six- to 12-month horizon. Analysts expect earnings to grow 20% for tech and around a solid 8% for the rest of the market over the next 12 months, LSEG Datastream data show. We think the AI theme has more room to run. But as investors question big capital spending on AI by top tech companies, we’ve broadened our AI overweight to other sectors supporting the AI buildout: energy, utilities, real estate and industrials.
Staying nimble
We remain nimble as we eye the U.S. election, geopolitics and big policy shifts globally. We went overweight Chinese stocks after the policy signal from the September politburo meeting suggested major fiscal stimulus may be coming. That doesn’t change the long-term structural challenges we are concerned about. We trimmed our Japanese equity overweight due to the drag on earnings from a stronger yen and mixed policy signals from the Bank of Japan. Iran’s strike on Israel and Israel’s promise of retaliation mark a major escalation in the Middle East. Its market impact has been limited but might grow if there’s further escalation. We stay pro-risk for now. Such events underscore that geopolitical risk is structurally elevated.
Long-term bonds may not reliably buffer against risk asset volatility in a supply-driven regime as shocks that fuel inflation could also push up yields. We prefer quality and income in bonds. We find it in Europe: short-term credit on less tight spreads and government bonds as yields better reflect our policy rate expectations than in the U.S. We like medium-term bonds in the U.S. as markets price in deep Fed rate cuts. On a strategic horizon, we like infrastructure equity and private credit as they look set to benefit from mega forces. Private markets are complex, with high risk and volatility, and aren’t suitable for all investors.
Our bottom line
We use our investment framework as an anchor in volatile markets heading into Q4. A key part of that involves interpreting incoming economic data through the lens of a world shaped by supply constraints – not a typical business cycle.
Market backdrop
U.S. stocks were largely unchanged on the week, masking an uptick on Friday after a strong U.S. jobs report for September. Two- and 10-year Treasury yields surged to about 3.93% and 3.97%, respectively. Meanwhile, markets have somewhat reduced rate cut expectations that we thought were overdone. The U.S. economy added 254,000 jobs in September, well above consensus expectations. Strong job creation alongside easing wage pressures points to a still-expanding labor supply.
This week we eye U.S. CPI to see whether inflation will keep falling toward the Fed’s 2% policy target. Recent PCE data shows core inflation is moderating as consumer spending on goods and services and supply have normalized after the pandemic. Immigration is also boosting the labor supply, cooling wage growth. Yet in the long term, we see structural supply constraints like a shrinking workforce due to population aging making inflation pressures persist.
Week ahead
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of Oct. 3, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.
Oct. 8
U.S. trade data
Oct. 10
U.S. CPI; Japan corporate goods prices
Oct. 13
China CPI and PPI
Oct. 10-17
China total social financing
Read our past weekly commentaries here.
Big calls
Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, October 2024
| Reasons | ||
|---|---|---|
| Tactical | ||
| AI and U.S. equities | We see the AI buildout and adoption creating opportunities across sectors. We get selective, moving toward beneficiaries outside the tech sector. Broad-based earnings growth and a quality tilt make us overweight U.S. stocks overall. | |
| Japanese equities | A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks. | |
| Income in fixed income | The income cushion bonds provide has increased across the board in a higher rate environment. We like quality income in short-term credit. We’re neutral long-term U.S. Treasuries. | |
| Strategic | ||
| Private credit | We think private credit is going to earn lending share as banks retreat – and at attractive returns relative to public credit risk. | |
| Fixed income granularity | We prefer intermediate credit, which offers similar yields with less interest rate risk than long-dated credit. We also like short-term government bonds, and UK long-term bonds. | |
| Equity granularity | We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten our outlook. | |
Note: Views are from a U.S. dollar perspective, October 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, October 2024
Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.
| Asset | Tactical view | Commentary | ||||
|---|---|---|---|---|---|---|
| Equities | ||||||
| United States |  |
We are overweight given our positive view on the AI theme. Valuations for AI beneficiaries are supported as tech companies keep beating high earnings expectations. We think upbeat sentiment can broaden out. Falling inflation is easing pressure on corporate profit margins. | ||||
| Europe |  |
We are underweight relative to the U.S., Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious. | ||||
| U.K. | |
We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets. | ||||
| Japan | |
We are overweight. A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks. | ||||
| Emerging markets |  |
We are neutral. The growth and earnings outlook is mixed. We see valuations for India and Taiwan looking high. | ||||
| China |  |
We are modestly overweight. Major fiscal stimulus may be coming and prompt investors to step in given Chinese stocks are at a deep discount to DM shares. Yet we stay ready to pivot. We are cautious long term given China’s structural challenges. | ||||
| Fixed income | ||||||
| Short U.S. Treasuries | |
We are underweight. We don’t think the Fed will cut rates as sharply as markets expect. An aging workforce, persistent budget deficits and the impact of structural shifts like geopolitical fragmentation should keep inflation and policy rates higher over the medium term. | ||||
| Long U.S. Treasuries | |
We are neutral. Markets have priced back in sharp Fed rate cuts and term premium is close to zero. We think yields will keep swinging in both directions on new economic data. | ||||
| Global inflation-linked bonds | |
We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term. | ||||
| Euro area government bonds | |
We are neutral. Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability. | ||||
| UK Gilts | |
We are neutral. Gilt yields have tightened to U.S. Treasuries and market pricing of future yields is in line with our view. | ||||
| Japan government bonds |  |
We are underweight. Stock returns look more attractive to us. We see some of the least attractive returns in JGBs. | ||||
| China government bonds | |
We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper. | ||||
| U.S. agency MBS | |
We are neutral. We see agency MBS as a high-quality exposure in a diversified bond allocation and prefer it to IG. | ||||
| Short-term IG credit | |
We are overweight. Short-term bonds better compensate for interest rate risk. We prefer Europe over the U.S. | ||||
| Long-term IG credit | |
We are underweight. Spreads are tight, so we prefer taking risk in equities from a whole portfolio perspective. We prefer Europe over the U.S. | ||||
| Global high yield | |
We are neutral. Spreads are tight, but the total income makes it more attractive than IG. We prefer Europe. | ||||
| Asia credit | |
We are neutral. We don’t find valuations compelling enough to turn more positive. | ||||
| Emerging market - hard currency | |
We are neutral. The asset class has performed well due to its quality, attractive yields and EM central bank rate cuts. We think those rate cuts may soon be paused. | ||||
| Emerging market - local currency | |
We are neutral. Yields have fallen closer to U.S. Treasury yields, and EM central banks look to be turning more cautious after cutting policy rates sharply. | ||||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. The statements on alpha do not consider fees. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Euro-denominated tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, October 2024
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| Europe ex UK | |
We are underweight relative to the U.S., Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious. | ||
| Germany | |
We are neutral. Valuations and earnings momentum are supportive relative to peers, especially as global manufacturing activity bottoms out and ECB rate cuts ease financing conditions. | ||
| France | |
We are underweight given modestly supportive valuations. The result of France’s parliamentary election could impact business conditions for French companies. Yet only a small portion of the revenues and operations of major French companies are tied to domestic activity. | ||
| Italy | |
We are underweight. Valuations dynamics are supportive relative to peers, but recent growth and earnings outperformance seems largely due to significant fiscal stimulus in 2022-2023 that cannot be sustained over the next few years. | ||
| Spain | |
We are neutral. Valuations and earnings momentum are supportive relative to other euro area stocks. The utilities sector looks set to benefit from an improving economic backdrop and advances in AI. | ||
| Netherlands | |
We are underweight. The Dutch stock markets' tilt to technology and semiconductors, a key beneficiary of higher demand for AI, is offset by relatively less favorable valuations and a weaker earnings outlook than their European peers. | ||
| Switzerland | |
We are underweight, in line with our broad European view. The earnings outlook has brightened, but valuations remain high versus other European markets. The index’s defensive tilt will likely be less supported as long as global risk appetite holds up, we think. | ||
| UK | |
We are overweight. Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets. | ||
| Fixed income | ||||
| Euro area government bonds | |
We are neutral. Market pricing reflects policy rates in line with our expectations, and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability. | ||
| German bunds | |
We are neutral. Market pricing reflects policy rates broadly in line with our expectations, and 10-year yields are off their highs. | ||
| French OATs | |
We are neutral. The EU has already warned France for breaching fiscal rules and had its sovereign credit rating downgraded earlier this year. Elevated political uncertainty, persistent budget deficits and a slower pace of structural reforms remain challenges. | ||
| Italian BTPs | |
We are neutral. The spread over German bunds looks tight given its budget deficits and debt profile, also prompting a warning from the EU. Other domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields. | ||
| UK gilts | |
We are neutral. Gilt yields have tightened to U.S. Treasuries and market pricing of future yields is in line with our view. | ||
| Swiss government bonds | |
We are neutral. The Swiss National Bank cut policy rates twice this year amid reduced inflationary pressure. But it is unlikely to cut rates much further from here. | ||
| European inflation-linked bonds | |
We are neutral. We see higher medium-term inflation, but cooling inflation may matter more near term. Short-term breakeven inflation rates fell further after recent inflation data, making euro area inflation-linked bonds less attractive. | ||
| European investment grade credit | |
We are neutral European investment grade credit, with a preference for short- to medium-term paper for quality income. We maintain our regional preference for European investment grade over the U.S. given spreads are not as tight. | ||
| European high yield | |
We are overweight. We find the income potential attractive. We still prefer European high yield given its more appealing valuations, higher quality and lower duration than in the U.S. Spreads compensate for risks of a potential pick-up in defaults, in our view. | ||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, October 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Vivek Paul
Global Head of Portfolio Research – BlackRock Investment Institute
Natalie Gill
Portfolio Strategist – BlackRock Investment Institute
