00:00
Cover
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 December.
00:10
Slide 3: December key takeaways
December brings us more clarity than we had at the beginning of November. We’re now past the elections, and many who had pulled back on risk pre-election have now added it back. We also got another 25 bp rate cut from the Fed last month, which should be an additional tailwind for assets.
Less uncertainty, a lower fed funds rate, and a U.S. economy that has been surprising to the upside, all keep us overweight stocks and leaning into credit within bonds.
While falling fed funds rates have typically driven stronger bond performance, we saw the opposite scenario play out this time around as a more optimistic economic outlook challenged the future path of policy rates. We continue to be wary of long-dated treasuries in the face of potentially-inflationary public policy and a rising U.S. deficit, and are seeking out additional portfolio diversification from alternatives.
00:58
Slide 4: 2024 wrapped - macro
As we approach the end of the year, it’s worth a quick look back at what’s happened so far, as well as our outlook for 2025.
First, let’s talk about the macro: inflation’s ride down may have been a little bumpy this year, but it has come down – and come down enough for the Federal Reserve to be comfortable starting to cut interest rates in September. A normalizing labor market also helped here, and we saw a 50 bp cut in September followed by another 25 in November.
The U.S. economy stayed resilient, with GDP growth staying well out of recession territory.
As we look forward, inflation remains a risk, as proposed policy changes such as immigration restrictions and tariffs could drive prices higher. And if inflation does pick up again, investors will need to take an active approach to diversification, since duration might not work. Instead, we look to alternatives and an active approach to security selection and curve positioning, which could also include looking abroad for quality duration exposure.
02:00
Slide 5: 2024 wrapped - equities
2024 has been another great year for equities – the S&P 500 is up over 20% for the second year in a row. But this year hasn’t just been a repeat of 2023… where last year saw the bulk of the S&P 500 driven by those magnificent seven stocks, we saw broader stock market performance this year, mostly broadening out in the second half. Growth certainly has still led the way this year, but smaller caps and value have been making a run for it since the second half began.
Looking forward, we’re staying overweight stocks, and U.S. large cap stocks in particular. While the small cap rally has been significant, we don’t believe that valuations and profit margins justify today’s prices… and with the Fed projected to keep interest rates relatively high for longer, we’re concerned that still-high borrowing costs could continue to weigh on smaller cap companies.
02:52
Slide 6: 2024 wrapped: bonds
Moving to bonds, it’s been a weird year for bonds. All eyes were on bond markets following the Fed’s rate cut back in September, but instead of following the historical playbook, they veered in the opposite direction – the 10Y treasury rate rose by 75 bps between September 17th and November 22nd. Core bond indexes, which had been having a reasonably fine, but maybe a little volatile, year up to that point, fell as yields rose.
Meanwhile, income drove the bulk of bond returns – in a year where credit spreads stayed tight, the higher the yield, the higher the return. High yield bonds are beating investment grade bonds by about 5% YTD, thanks to higher yields, shorter durations, and narrowing credit spreads.
Looking ahead, we continue to lean into carry within bonds – we’re comfortable with today’s spread levels, and believe that higher yields could help provide ballast against market volatility. We also continue to underweight long duration treasuries, instead preferring exposure to the short-to-intermediate part of the curve.
03:55
Slide 7: 2024 wrapped: alts
While long bonds didn’t do much to help portfolios this year, alternatives did a lot. Many alternative strategies delivered returns well in excess of bonds, while maintaining bond-like risk and low correlations to equities.
With rising U.S. deficits and the potential for inflation putting pressure on bonds, alternatives may continue to play a critical role in portfolio diversification going forward. Add in cash rates that are projected to stay reasonably high, and “cash plus alpha” strategies look even more attractive.
04:25
Slide 8: 2024 wrapped: taxes
Those who are rebalancing taxable portfolios may be facing everyone’s favorite challenge: limited losses available to harvest to offset gains.
While a look to price returns (instead of total returns) may uncover some opportunities – as an example, many bond funds are down on a price return basis even though their high yields have led to positive total returns– this is a year in which tax loss harvesters had to get more creative. Even though the broad indexes are up, there’s still plenty of dispersion below the surface – 25% of the S&P 500 stocks are down this year, as an example. Those with access to direct indexing SMAs may appreciate their ability to tax loss harvest on your behalf.
Keep an eye on any planned capital gains distributions as well – there are some huge distributions that have already been announced. Look out for equity mutual funds in particular, where we’re seeing – as an example – the average large cap value fund potentially distributing a 5% gain. We’ve seen one large growth fund that is estimating a 62% gains distribution. If you’re concerned about the funds in your portfolio, you can check out the tools on our Advisor Center to see whether any of the funds you’re holding have announced distributions.
05:36
Slide 9: Our best portfolio implementation ideas for today
To sum it all up, we’re overweight U.S. equities, and large caps in particular. We’re also taking advantage of high yields, gearing more of our bond portfolios towards “carry” vs. duration. And last, we’re balancing out our multi-asset portfolios with alternatives. 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.
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.
