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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 January 2025 (and happy new year to you all, by the way).
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Slide 3: January key takeaways
We’re feeling optimistic as we start the year. The U.S. looks to be poised to continue its exceptional run, with positive growth expectations, and also tailwinds from potential public policy: we could see lower tax rates and easing regulations, in addition to what we’ve already seen from AI technology and easing Fed policy.
Higher bond yields could also mean better returns out of bonds, though we’ve seen the typical relationship between the Federal Funds Rate and longer-term treasuries break as longer-term yields actually rose through Q4, despite the Fed cutting rates by a full 1%. We’re under-weighting long duration bonds, instead getting more of our diversification from higher-yielding (but still high quality) “plus” sector bonds and alternatives.
Alternatives in particular have continued to play a critical role in portfolios, as stock and bond correlations have remained high. Bonds have lost money in each of the last 14 down months for the S&P 500, including just last month in December, when the S&P 500 was 2.4% and the Agg Bond Index was down 1.7%.1
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Slide 6: 2024 wrapped - equities
Let’s do a quick review of markets last year. The S&P finished out 2024 up 25%, with large cap growth stocks up 36% and the Magnificent 7 stocks up 67%. International equities underperformed in a big way again, as did small caps… despite making a big run in the second half through November.
Growth stocks held up OK in the December pull-back, but we saw the risks of small caps last month as they pulled back over 8%, erasing a good portion of their YTD gains.
Looking forward, we’re staying overweight stocks, and U.S. large cap stocks in particular. We didn’t chase the small cap rally, over concerns around valuations and profitability, and are feeling good about that call – particularly with the Fed projected to keep interest rates relatively high for longer.
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Slide 7: 2024 wrapped: bonds
Moving to bonds, we finally saw the yield curve dis-invert as the Fed lowered the Fed Funds Rate while longer-term rates rose. While it is certainly atypical for longer-term yields to rise in this scenario – and by 92 bps, no less – it does potentially set bonds up for a better year in 2025.
Anything with duration in it was punished for it last year, though higher yields protected most categories from losing money on a total return basis. Credit spreads tightened a little through the year, boosting higher yielding asset classes even further.
Looking ahead, we continue to lean into income 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.
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Slide 8: 2024 wrapped: alts
Now, 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.
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Slide 14: Unsure how to position bonds in your clients’ portfolios?
If you’re wondering how all of this fits together into a diversified portfolio, you’re not alone. Consider this example of how we’re thinking about it here: we’re combining “plus” sector bonds for the income, high quality ballast for the “just in case,” and alternatives to provide additional diversification in case persistent inflation causes stock/bond correlations to remain high. This could look like a “bond” portfolio that has a more even split between traditional core bonds and “plus” sector bonds, and also one that adds alternatives into the mix.
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Slide 15: Tight spreads and low long-term bond yields…
After all, you’ve gotten a much better spread over cash from alternatives than from bonds. Based on yields as of 12/31, you’re getting 26 bps of yield to step out of cash and into 10Y bonds, 102 to step into investment grade credit, and 318 to step into high yield bonds. Compare that to the cash + 3-5% than many alternative strategies target… and have been able to deliver with lower risk and lower correlations to stocks… and alternatives make even more sense.
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Slide 9: Our best portfolio implementation ideas for today
To sum it all up, we’re overweight 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.
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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.
