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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 Advisor Outlook update for October.
Now, one of the most important recent market-moving events was the Fed’s recent pivot towards easing policy rates, with a 50 bp interest rate cut announced in September and more cuts on the way.
We’re also seeing potential for volatility to pick up around the election and conflict in the middle east, but we’re staying cautiously optimistic on a U.S. economy that appears to be in good shape and likely to avoid a near-term recession. The Fed starting to ease rates out of restrictive territory helps bolster that optimism, since rate cuts – and less uncertainty out of the Fed – should provide a tailwind for stocks and bonds.
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Slide 3: October key takeaways
Three key takeaways to know going into October:
First and foremost is that cash rates are coming down, which should have implications for investors and asset allocators who may now be looking to redeploy cash and boost income.
Second is that we see recession odds remaining low. Even if we see growth slow from here – and Q3 GDP estimates are thus far pretty strong – we don’t expect growth to stall out.
And third is that earnings growth has been broadening – and is expected to continue to broaden – beyond mega cap technology. Economists are projecting Mag 7 earnings growth to slow, but for the rest of the S&P 500 universe’s earnings growth to pick up.
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Slide 4: The Fed cut rates by 50 bps in Sept
Let’s start by talking about the Fed. Not only did they cut interest rates by 50 bps, they also released a new summary of economic projections that suggested another 50 bps of cuts this year, plus another 100 next year.
Now, markets are still projecting additional cuts beyond that, and we think they might be pricing in too many cuts, making short-term bonds less attractive to us in the near-term.
But it’s also worth pointing out a bit of the ‘why’ behind the 50 bp cut. Typically, the Fed doesn’t cut by 50 bps when the economy is doing this well, raising concerns among some that they could be more concerned about a recession than we are. That said, when you look at the current level of ‘real’ rates – which are calculated by subtracting inflation from nominal rates – you see that actually interest rates have been getting quite restrictive as inflation has fallen. And with inflation having fallen by so much, they don’t need to be that restrictive… so the Fed kicked off the easing cycle with a big cut.
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Slide 6: Recession odds remain low
In fact, our in-house economists are predicting low odds of a recession, based on the economic data that’s been coming in. Currently, our Systematic Active Equity team is estimating a 13% likelihood of recession, based on a combination of widely used recession indicators and more proprietary ones like an increase in OpenTable bookings suggesting that consumers are still comfortable spending.
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Slide 10:Post-cut market returns depend on recession
Now, this may be stating the obvious, but whether or not you expect a recession will have a huge impact on where returns go from here, and where you allocate.
While we think markets are pricing in too many cuts given our rosier economic outlook, if we were to see a recession, market pricing could be justified – and then some. And while longer-term bonds are typically less sensitive to the Fed Funds rate, we have seen 10Y bond yields fall – and thus 10Y bond prices rise – when the Fed cuts rates into a recession.
As you’d expect, the opposite happens with equities. When the Fed cuts rates and there’s no recession, stocks tend to do well, on average appreciating by quite a bit in the months following the first Fed cut.
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Slide 8: Our best portfolio implementation ideas for today
With all that in mind, here’s how we’re positioning portfolios today:
We believe that ‘good news’ Fed cuts should support risk assets, leading us to like U.S. stocks and also plus sector bonds.
We’re still overweight large cap quality vs. small caps, though, as we consider the potential for volatility to rise and growth to slow.
And we’re building diverse sources of diversification into multi-asset portfolios, under the view that high quality bonds should provide ballast if recession fears pick up and that cash plus alternatives should be able to continue delivering strong idiosyncratic returns.
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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!
