March 2024 highlights
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I’m Carolyn Barnette, Head of BlackRock’s Market and Portfolio Insights for U.S. Wealth team, here with your Advisor Outlook update for March.
Slide 7: U.S. market remains concentrated…
We’ve now seen the bulk of U.S. companies report their Q4 earnings, and most beat expectations. The S&P 500 continues to reach for all-time highs, but underneath the surface, performance remains concentrated in a few high-flying names – Nvidia most notable among them, driving a quarter of the S&P 500’s performance in the first two months of the year.
But performance is starting to broaden out – and the ‘magnificent seven’ top contributors to S&P performance are no longer just tech names.
We continue to like those megacap U.S. quality names, and maintain an overweight there, but are also watching for signs of the equity rally continuing to broaden out, and seeking out undervalued parts of the market – such as select exposures within large value and healthcare.
Slide 6: How does your equity sleeve compare?
Looking through to the 20,000 advisor portfolios we’ve analyzed over the last twelve months, we find that most advisors are overweight mid and small caps… compared to our own model portfolios, the average advisor has close to 4x the allocation to small caps, and a much smaller allocation to the large caps that we prefer.
Our view is that we are unlikely to see small cap outperformance until we see a reacceleration of the economy – vs. the slowing, but positive growth that we expect. We are likely to maintain our preference for quality stocks with strong balance sheets and positive earnings as long as we are in this current environment of high interest rates… which could remain in place through 2024.
Slide 5: Fed cuts are likely looking at a summer start date…
Turning to bonds, in February, we saw bond markets reprice on the back of a higher-than-expected CPI print and Fed officials expressing concern with the idea of cutting interest rates too soon. Markets had been pricing in as high as an 84% likelihood of a March cut at the beginning of the year, and are now pricing in a roughly 2% chance of that happening… instead looking to June or July as the more likely time for a first cut.
Interest rates rose as a result, creating what could be the last chance for any investors still holding onto cash to step back into bonds.
Slide 11: How does your fixed income sleeve compare?
The advisor models we’ve analyzed show that many are still holding onto high allocations to cash and short-term bonds – nearly ¼ of the average advisor’s fixed income model is allocated to that space.
And that could be under-clubbing the opportunity out there, especially with the expectation that cash rates are likely to fall later this year.
We continue to see opportunity in core bonds: high quality duration assets should do well when the Fed eventually drops its target from the current 5.25-5.50% to its longer-term rate of 2.5%. In the meantime, though, an active approach to curve positioning and security selection should add value: our models have a significant allocation to flexible bond funds for that very reason.
Slide 15: diversify your diversifiers
We also see a lot of value in diversifying into alternatives: we’ve all seen and felt higher bond market volatility over the past two years. And while most bond funds’ volatility jumped in tandem with the markets, the average nontraditional bond and average diversifying alternative fund – here we’re showing the multi-strategy and equity market neutral categories – maintained a risk profile similar to what we generally expect from a bond fund. And they delivered comparable – or even stronger – returns to bonds last year, with half the risk.
We expect high interest rates and security dispersion to continue benefiting alternatives, and are using them to complement our more traditional bond exposures.
Slide 4: March key insights
I’ll leave you with three themes to sum it all up:
We’re still overweight U.S. equities, and continue to prefer quality. A broadening equity rally could create additional opportunities outside of U.S. megacaps, and we like select undervalued exposures like U.S. large value. We like bonds over cash, and see opportunity to lock in today’s higher yields before the Fed starts cutting rates… and also see potential alpha to be had from taking a flexible approach to fixed income and active curve positioning. And last, we believe alternatives will continue to play a critical role in portfolios, potentially diversifying risk and amplifying returns in a higher rate, higher dispersion environment.
Slide 13: 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 BLK market team or call (877) ASK-1BLK.
We continue to like quality at the core, and see opportunity to expand into undervalued parts of the market.
We believe that markets are now pricing in more realistic expectations of Fed policy, and seek to take advantage of today’s higher yields.
Elevated bond market volatility suggests a more active – and less traditional – approach to managing volatility. We complement our core bond positions with diversifying alternatives.
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