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BlackRock Bottom Line: BlackRock Investment Institute 2025 Global Outlook

Speaker: Wei Li, Global Chief Investment Strategist, BlackRock

Script:

Mega forces, like the rise of artificial intelligence (AI) and geopolitical fragmentation, are transforming economies. That means investors can no longer view the world in terms of business cycles or temporary deviations around stable long-term trends. Understanding the forces reshaping global economies can help investors identify unique opportunities.

Our three investment themes as we head into 2025 are: financing the future, rethinking investing and staying pro-risk.

Title: BlackRock Investment Institute 2025 Global Outlook

Our first theme is financing the future. Sizable capital will be needed as the rise of AI, the low-carbon transition and other mega forces drive a broad infrastructure buildout. With governments constrained by high public debt, capital markets will play a pivotal role in providing the funding needed. Private markets can offer exposure to broader sources of credit as well as to early-stage growth companies driving AI adoption.

Our second theme is rethinking investing. An ever-changing outlook calls for an ever-evolving portfolio. It calls into question many long-held investing principles, including the idea of a neutral benchmark portfolio like the traditional 60/40 portfolio mix of stocks and bonds. As mega forces reshape whole economies, we think investors should focus more on themes and less on broad asset classes. And with a wide range of possible outcomes, investors may wish to reassess portfolios more often.

Our third theme is staying pro-risk. We see the U.S. still standing out versus other developed markets thanks to stronger economic growth and its ability to capitalize on mega forces. We recognize some U.S. equity valuations look expensive but don’t think historical averages are necessarily a good guide amid a transformation.

The bottom line is: Moving into 2025, we think investors could benefit from viewing the world through the lens of transformation. We stay risk-on as we look for transformation beneficiaries. We think being more dynamic with portfolios and getting granular with views will both be essential.

BlackRock Bottom Line: BlackRock Investment Institute 2025 Global Outlook

Speaker: Wei Li, Global Chief Investment Strategist, BlackRock

Script:

Mega forces, like the rise of artificial intelligence (AI) and geopolitical fragmentation, are transforming economies. That means investors can no longer view the world in terms of business cycles or temporary deviations around stable long-term trends. Understanding the forces reshaping global economies can help investors identify unique opportunities.

Our three investment themes as we head into 2025 are: financing the future, rethinking investing and staying pro-risk.

Title: BlackRock Investment Institute 2025 Global Outlook

Our first theme is financing the future. Sizable capital will be needed as the rise of AI, the low-carbon transition and other mega forces drive a broad infrastructure buildout. With governments constrained by high public debt, capital markets will play a pivotal role in providing the funding needed. Private markets can offer exposure to broader sources of credit as well as to early-stage growth companies driving AI adoption.

Our second theme is rethinking investing. An ever-changing outlook calls for an ever-evolving portfolio. It calls into question many long-held investing principles, including the idea of a neutral benchmark portfolio like the traditional 60/40 portfolio mix of stocks and bonds. As mega forces reshape whole economies, we think investors should focus more on themes and less on broad asset classes. And with a wide range of possible outcomes, investors may wish to reassess portfolios more often.

Our third theme is staying pro-risk. We see the U.S. still standing out versus other developed markets thanks to stronger economic growth and its ability to capitalize on mega forces. We recognize some U.S. equity valuations look expensive but don’t think historical averages are necessarily a good guide amid a transformation.

The bottom line is: Moving into 2025, we think investors could benefit from viewing the world through the lens of transformation. We stay risk-on as we look for transformation beneficiaries. We think being more dynamic with portfolios and getting granular with views will both be essential.

Opening (00:00)

This is Mark Peterson with the December 2024 BlackRock Student of the Market update.

Slide 2 (00:08)

This month we'll hit a bunch of slides on stocks, talk about some timely issues, including something that's always near and dear to us, S&P envy, and we'll finish up with a couple on bonds and alternatives.

Slide 3 (00:22)

Let's begin on the stock side. First off, nice November post-election, up 5.9% for the S&P 500. Bonds bounce back as well, up 1.1% after a tough October where both were negative. And on the right side, I just thought it was interesting to highlight the returns by month for the year. Even going back to last November, that was the last time we had a return as good as we had this November, 5.9% versus 9.1% last November for U.S. stocks. And bonds as well, similar story. But I thought it was interesting. You can just see how good of a year this has been for U.S. stocks. Only two months that were negative, April really being the only meaningful month of a pullback. So very steady gains across the board for U.S. stocks so far this year.

Slide 4 (01:09)

Stepping ahead, talking about that S&P envy, what we mean by this, of course, is when the stock market does well, significantly outpacing the diversified balanced portfolio. In this case, we look at a 60/40 portfolio. Obviously, there can be some regret that you don't own more stocks and more risk assets because the gap between what U.S. stocks have done the last couple years in the diversified portfolio is pretty wide. And the diversified portfolio certainly has done well, but when you contrast it to how well U.S. stocks have done, oftentimes investors can get that feeling of S&P envy. So acknowledging that, I think that's something I hear most from investors and advisors across the country, is they have a lot of folks with that S&P envy where the portfolio has done well. But you know what's done a lot better? U.S. stocks. And that can create some of that envious feeling.

And on the right side, I always think it's important to highlight, if we do get a downturn, how much would it take for this diversified portfolio to catch up? Just looking at the math, just starting with the bull market from 2022 in October to the end of November of this year, you can see stocks are up about 74 percent. Diversified portfolio is up almost 47 percent in that environment. So not bad. You're capturing about 63 percent of the S&P market upside. So the question is, what would it take from a bear market standpoint to actually pull even or actually pull ahead for the diversified portfolio? And it's actually not as large as I thought it would be. It's only about a 34 percent drawdown, which is certainly significant, but not out of the realm of possibility. You can see the diversified portfolio would actually catch up and outpace the S&P 500, if that's what we experience. Assuming the same kind of capture on the drawdown, where you're actually protecting about 63 percent, only capturing about 63 percent of that bear market return on the downside as well. You can see you actually end up slightly ahead in the bottom right-hand corner with obviously a lot less risk in that diversified portfolio. So I think it's always important you can look at what happens with the diversified portfolio in a good market, but let's also think about why we diversify in the first place. It's to limit that downside. So if we did get a pullback greater than 34 percent, you'd be much better off in that diversified portfolio. I think it's good to set those expectations, remind folks why we build portfolios the way we do. You don't need all the upside of what the bull market brings. Just get a chunk of that upside. Limit the losses in a tough market, like if we were down 34 percent. That's how we build wealth over time. It's just tough to see. You get into some of these periods where the S&P envy feeling can be really revved up and can make folks feel like they're leaving too much money on the table. But again, remind them why we invest the way we do, why we asset allocate and diversify, and spread their investment eggs across a variety of investment baskets. It's all to get to that “winning more by losing less” feeling that you get on the bottom right-hand side of the slide.

Slide 5 (04:25)

Looking forward to 2025, I think one of the best indicators are just, for U.S. stocks anyways, is what's happening with flows and flows into mutual funds and exchange traded funds. It's been pretty modest this year and last year as well. You think about that we're up over 25% this year. We're up over 26% last year in U.S. stocks. Yet inflows into mutual funds and exchange traded funds that are invested in stocks has been pretty modest. Last year was actually slightly negative, which is a really bullish sign by the way. And this year has been pretty modest. $81 billion so far through the end of October. You can see where that ranks historically. Nowhere close to what we saw in 2021 or some of the best inflow years that we've had. But you can see on the right side we just matched up this 30-year window. When you get some of your best inflowing years, that's actually when stocks do their worst in the next calendar year. You average 1.6% following periods where you get a ton of money flowing into mutual funds, exchange traded funds that are focused on stocks. You can see that if you invest following a worst outflowing year, like 2020 was a great example. Look at 2020. We all know stocks were up big in 2021. You average almost 24% in those worst 10 calendar flowing years for U.S. stock mutual funds and exchange traded funds. This year would qualify right in the middle. It's actually middle-bottom. $81 billion. And you figure if we do closer to $100 billion by year-end, that puts you right in the middle, which again is somewhat of a bullish sign, 14.6% in those middle years. So some optimistic news. It just shows that the sentiment overall in the retail market is not chasing this bull market in an enormous way. It's modest, but certainly not anything that's overboard like we've seen in the past.

Slide 6 (06:31)

We've talked a lot about the fact that stock and bond correlation has been pretty high. I think it's even higher than a lot of folks realize. Normally when stocks are negative, that's really the correlation you're most concerned about, right? You want support when stocks are negative. So those months where stocks lose money, and it happens about one out of every three months historically, so 32% of the time going back to 1926, stocks lose money. Bonds are positive more than half the time. So exactly what you'd hope for, right? You'd probably obviously love to see this even higher, but more than half the time bonds are positive since 1926. But look what's happened recently here on the right side of the slide. The last 13 months that stocks have lost money, and this happened in October, wasn't a huge loss, but stocks were down a little bit less than a percent. Bonds were down as well. And this has happened 13 consecutive times. Going back, the last time you can find a month where you actually made money in bonds when stocks lost was all the way back three years ago in November of 2021. 13 consecutive months. We went back to 1926 and we couldn't find a streak of more than six months in a row. Back in 1994 was actually when it happened where stocks lost money and bonds lost money as well. Six versus 13 today I think really highlights how in tune or at least in tandem stocks and bonds have been moving, which certainly has been frustrating I know for portfolios. Hopefully we get some relief here at some point because we have reset interest rates higher on the bond side, but we're just in a bad rhythm overall where stocks and bonds have never moved as much in tandem as they are today. Certainly something to keep an eye on and we'll talk about alternatives later. Maybe a case for adding alternatives as well.

Slide 7 (08:24)

Moving on to the small-cap space. Saw a great month for small company stocks here post-election in November. They were up 11% in the month of November versus large caps up about 6%. And you can see year-to-date though they still trail. Even after such a big performance month, they're still trailing year-to-date. And this is something we've noticed in the past is when you get some of this burst of performance for small caps, it tends not to be very durable. You can see even back in December of last year, December 2023, small caps were up 12%, large caps were up only 4.5% in that month. But obviously with the year-to-date number, large caps have pulled ahead again. So you get some of this burst of performance on the small cap side. You can see on the right side, bottom right-hand corner, the next year following periods where small caps have had a big shot of performance, it just doesn't carry through. Large caps have actually outperformed. Granted this has been a period large caps generally have done better, but this is a sentiment that we hear from a lot of our investors internally here at BlackRock that we still like large caps over small. Small cap earnings are a little bit more challenged than some of the large cap companies. So we think you're going to have these bursts of performance. It just tends not to be a great sign for small caps over the next 12 months.

Slide 8 (09:50)

And of course getting closer to tax season and coming into year-end tax selling, capital gains distribution is a huge issue for mutual funds, especially on the active side. You can see the…we just looked at the top 25 largest active equity funds out there. Over a hundred billion in assets. Most of them are in outflows. The average outflow is nine billion dollars, which is significant. That, coupled with turnover, means that you've got some portfolios that are going to kick off some gains. Especially because look at the average potential cap gain exposure for these largest mutual funds. Forty-three percent, almost half the fund, is actually embedded gains. So you get any kind of turnover or selling to meet outflows, you're going to trigger some of those cap gain distributions. So I think we all know this to be the case. Great when the market's up, but some of these funds are sitting on some enormous embedded gains. Especially those that are in outflows really have to sell to meet some of those gains, it can be a tremendous challenge. So something to keep an eye on. Of course we have our tax tool here at BlackRock that we're proud of. You can find it on the web. A great way to track some of those capital gain distributions and try to minimize the impact as much as you can on end investors.

Slide 9 (11:12)

Switching gears on the bond side, we've talked about this, but I think it's important to really highlight the fact that real yields on bonds are the highest that we've seen really since 2015. Almost 10 years. Of course real yields are inflation adjusted. So just taking the yield on the 10-year U.S. Treasury bond, adjusting for inflation, we're over 1.5 percent. And that's a pretty nice friendly territory for bonds and fixed income going forward. You can see on the right, whenever you have invested in bonds, whenever they have a positive real yield, you average 8.1 percent. And of course if you invest when they have a negative yield, which is really where we've been in the previous three plus years, your returns, all bets are off. And you're flat over that period when those real yields are negative. So bodes well for bonds going forward. We've reset interest rates to a healthy level. The fact that real yields are positive, history tells us that's a good time to put money to work into bonds and fixed income.

Slide 10 (12:17)

And the last slide on alternatives, we've highlighted this before, but we thought we'd dial it in a little bit more precisely. Just the fact that we think alternative funds are just a much better space today than they've been in the past. Look at the return standpoint. Some of this is due to the fact that cash rates are higher today than they were, especially versus 2004 to 2019, that five-year period. So returns on some of these alternative funds that can often be described as cash plus, are doing a much better job generating return. You can see just the average for all categories. So this is every dog and cat that fits in this alternative space, is up on average over this almost 5-year window, almost 5% for that entire period, 4.7%. And probably most importantly, look what's happened to the diversification piece. It's gotten much better as well, especially versus 2010, 2014. Correlations almost half of what they were during that period of time. So better returns, better diversification. We really like this alternative mutual fund space. Get cash plus returns that will diversify a portfolio, especially when stock and bond correlations are as high as they are, like we touched on earlier. We think it's a great story going forward into 2025.

Closing (13:41)

So that does it for our December version of BlackRock's Student of the Market Update. As always, if you have thoughts or comments or ideas for content, let us know on our web page. We have a space for comments and questions. Some of the best content comes from advisors across the country, so we certainly encourage that. But look forward to talking to you next time on BlackRock's Student of the Market Update. Thank you.

Student of the Market: December 2024

BlackRock’s Student of the Market provides monthly insights on current and historical market trends. Share these key insights with your clients now.

Featured Webinars for Advisors

View a webinar replay where BlackRock's leaders discuss how advisors can navigate markets and build stronger relationships with clients.

00:00:01

Hi, I’m Carolyn Barnette, Head of Market and Portfolio Insights for US Wealth here with your recap of our September In the Know Webinar.

00:00:07

We talked about three things today. We talked about public policy, we talked about markets, and we talked about preparing portfolios in a – for capital gains season.

00:00:20

So, first up, talking about public policy and elections. We’ve got one presidential race coming up, we also have 468 congressional races coming up. We heard that 82% of you are not planning on making any changes around the election but staying invested through it even if we do see market volatility pick up a bit as the races sort themselves out. Next, we spent a lot of time talking about markets, and in particular, that the Federal Reserve just cut interest rates by 50 basis points with guidance for another 50 basis points of cuts in 2024, followed by another 100 basis points cuts in 2025. So, seeing that cash rates are coming down, and starting to look for opportunities in other income producing assets, asset classes to make up income, whether that’s dividend paying equities on the equity side, spread assets within bonds, or looking at option overlays to earn even more income in a more volatile environment.

00:01:20

We also talked a lot about our economic outlook, growth staying resilient. You know, kind of GDP growth is staying well above recessionary levels. So, we’re staying invested in equities, but within equities, we like large cap, high qualities over smaller cap securities. Our concern is that rates are not dropping yet enough to really support those smaller cap securities that are struggling with higher borrowing costs, and if we do see growth start to slow, and certainly, the Q4 GDP growth outlook is lower than the one for Q3 and what we saw for Q2. So, we’re continuing to prefer those larger cap, less volatile names.

00:02:02

And also spent some time talking about strategies for really nervous investors looking for, you know, whether it’s minimum volatility equities, buffered strategies or those high-quality dividend payers as ways to stay invested in volatile markets.

00:02:19

We also talked a bit about, you know, what the path forward for inflation and unemployment might look like and how the combination of uncertainty around that, plus the yield curve being in the process of disinverting, really creates opportunities to get active within fixed income. We see a lot of opportunity to take advantage of yields in the belly of the curve and just are not seeing a lot of opportunity in the longer end barring a recession.

00:02:50

Last piece within markets, a really good time to be diversifying your diversifiers amidst that uncertainty. A lot of reason to have uncorrelated assets that might be able to benefit from higher volatility and also a high degree of dispersion between assets.

00:03:07

And then we wrapped up In the Know talking about how to rebalance in a tax efficient way because in a year where a lot of assets are up and a lot of advisors are thinking about rebalancing going into the end of the year, it could be hard to do that in a tax aware way.

00:03:23

So, we talked through some best practices, keeping an eye out for capital gains distribution announcements, and also looking for opportunities to potentially tax loss harvest below the surface. You know, one of those things is looking at price returns rather than total returns when you’re evaluating which one of your holdings might have a loss to harvest. But also looking at individual stocks that could be opportunities below the surface. You know, every year, even though, even years that the Russell 3000 was up, there was still plenty of individual stocks in there that were down and were creating those opportunities for tax loss harvesting.

00:03:59

So, hopefully the main takeaways that you got from all of that is that we are here for you. We want to be a great partner for you in these times.

00:04:09

So, you can always look to our Advisor Center for tools and also timely insights, and you can also reach out to your BlackRock partners or call 877-ASK-1BLK if you have any questions or there’s anything that we can help you with you. So, thank you very much, and we will see you next time.

00:04:33

(END)

In the Know recap: September 2024

Watch a recap of our latest In the Know event where our top thought leaders gathered to share their perspectives around inflation, the intricacies of investing in an election year and portfolio perspectives to tie it all together.