Strategic Income Opportunities Fund Monthly Insight

Wage growth on the horizon

Nov 17, 2017

Strength in the labor market is taking hold, further bolstering the case for rising rates.

Unemployment has been steadily declining over the past eight years. In October, the unemployment rate fell to 4.07%, which would have been almost unthinkable a few years ago, especially taking into consideration the growth in robotic technology and automation. Payroll employment took a hit from the hurricanes in September, but heartily bounced back with 261,000 jobs gained in October.

Wage growth, however, has been a laggard among economic growth measures for quite some time. We think this is about to change as full employment conditions may finally be starting to push wages higher. Although average hourly earnings have been slow to rise, the Employment Cost Index accelerated in the third quarter and U.S. median weekly earnings have taken a significant step higher.

U.S. Median Weekly Earnings Climbing Higher

Chart: U.S. Median Weekly Earnings Climbing Higher

Source: Bloomberg, data as of September 30, 2017.

We expect economic growth to remain robust through year end, with a modest, cyclical uptick in inflation. From a fiscal policy perspective, the prospect of tax reform in the United States is a near-term positive for growth. On the monetary policy front, we still anticipate developed-market central banks will be paring back on stimulus measures. We expect the Fed to raise the target federal funds rate to 1.50% at its December 13 meeting, and we anticipate at least two more rate hikes in 2018 to close the year at 2%.

In the Strategic Income Opportunities Fund, while continuing to maintain an overall low duration profile (interest rate risk), we slightly increased duration in October from 1.4 to 1.7 years (as of 10/31/17) by adding exposure on the short end of the yield curve. Additionally, we reduced some of the fund’s duration exposure to the 7- to 10-year portion of the curve in the later part of the month. We continue to favor securities that can provide high income, including securitized assets and emerging markets. Low volatility and strong economic momentum create favorable conditions for the performance of income-generating securities.

 

Outperformance with lower volatility

Chart: Outperformance with lower volatility

Source: Morningstar as of 10/31/17. Returns are from 10/31/16 through 10/31/17. Volatility is measured from 10/31/16 through 10/31/17 using daily returns. For standardized performance of the BlackRock Strategic Income Opportunities Fund,click here.

Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown. All returns assume reinvestment of all dividend and capital gain distributions. Refer to blackrock.com/sio for current month-end performance. Investment returns reflect total fund operating expenses, net of all fees, waivers, and/or expense reimbursement. Expenses stated as of the fund’s most recent prospectus: Institutional Shares Total/Net, Including Investment Related expenses are 0.76%/0.75% and have contractual waivers with an end date of 4/30/18 terminable upon 90 days’ notice. 

Find out how the BlackRock Strategic Income Opportunities Fund team is preparing for future rate hikes.

View fund commentary

Strategic Income Opportunities Monthly Insights

Subscribe to get timely market outlooks and portfolio positioning insights every month.