I’m Faye Witherall, here today with your Advisor Outlook update for July.
Now as we wrap up the first half of the year, markets have given us plenty to reflect on.
It was quite the quarter – we started with a near 15% decline in the S&P 500 at the intra-day lows, but ultimately, we ended up closing the quarter at a new all-time high.
Here are a few key highlights from the first half of the year:
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International continues to lead the way. We’ve seen strong outperformance from both developed markets and emerging markets – and this is not just in equities, but in bonds as well. Large cap growth came right back, unwinding Q1’s underperformance.
Diversification continues to matter - though not always from the sources we’re used to. Gold’s rally carried into Q2 and is now up over 26% year to date. And finally, even in a year when we’ve continued to talk about bond market volatility, the Agg has nearly doubled the return of cash so far year to date.
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Now there’s not a single smoking gun behind that price action, but rather one factor supporting markets was broadly resilient data. Recession odds have fallen meaningfully since April, and Q2 data offered little to suggest otherwise.
While we have seen recent economic data surprise modestly to the downside, we maintain our expectation for slowing, but not stalling, U.S. growth. The Atlanta Fed’s GDPNow estimate forecasts 2.5% GDP growth in Q2, and the Federal Reserve’s most recent Summary of Economic Projections looks for 1.4% GDP growth on the year.
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Now another important theme that emerged in the first half of the year was the meaningful dollar weakness. The dollar just posted its second straight quarterly decline and its worst first-half performance in decades.
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Now that weakness has supported U.S. funds with international exposures. Over the past decade, a strong dollar consistently weighed on international returns for U.S.-based investors. Unhedged positions benefiting from currency effects in only two of the last ten years. But with further dollar weakness potentially ahead, we may be entering a turning point: where currency becomes a tailwind to bolster returns, rather than a headwind to diminish them.
And, finally, June also brought us an updated Summary of Economic Projections from the Fed. The forecast revised growth lower, and inflation higher – this is a backdrop likely to keep rates in restrictive territory.
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Now inflation remains a key focus for the Fed, especially as we await further updates on both trade and fiscal policy. Revised interest rate projections suggest just 100 basis points of cuts between now and the end of 2027.
Now we covered quite a bit of ground, and I’d like to summarize with what we believe this means for portfolio implementation today:
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First and foremost, we stay up in quality with large caps. A backdrop of elevated interest rates may continue to weigh on small cap returns. We like adding to select international assets. We could see further momentum behind international stocks and bonds if the dollar continues to weaken. And finally, consider diversifying your portfolio diversifiers. Alternatives may be able to offset stock and bond market volatility, providing ballast when you need it most.
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Check out the full Advisor Outlook deck for more of our best thinking. 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 you can call 877-ASK-1BLK.
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