The rally at home

Sep 14, 2018

We believe U.S. asset outperformance versus other
regions is likely to persist for the near-term.

Asset class returns during the month of August embodied the key themes that we believe will be most important for investors for the remainder of the year: U.S. strength versus other developed markets, emerging market volatility and range-bound interest rates.

In the United States, we continue to observe above-trend fundamental data, including strong corporate earnings, capital expenditures (business investment) and consumer sentiment. U.S. stocks notably outperformed international markets, with the S&P 500 Index rallying over 3% in August whereas European equities, for instance, were negative. We believe U.S. outperformance will likely persist in the near-term, underscoring our preference for more domestic-oriented assets.

Emerging market risks flared again on the back of a stronger U.S. dollar, particularly for countries with limited currency reserves, large current account deficits and high rates of inflation. We expect broader contagion risk to remain low as the economies that have struggled most thus far are fairly small players on the global stage. The wild cards we are closely monitoring would be a meaningful slowdown in China or a negative outcome from trade negotiations. As a whole, the EM complex often experiences extreme shifts in volatility and thus needs to be appropriately managed and sized within a broader portfolio.

At the Federal Reserve’s annual policy meeting in Jackson Hole, Chairman Jerome Powell indicated that the central bank would not be rushed in hiking rates in the future. Given this relatively dovish stance combined with scant evidence of runaway inflation, we believe the Fed is now in the later stages of normalizing interest rates and most of the bond re-pricing is behind us. In this environment, we are finding opportunities in shorter duration assets, where yields have become more compelling relative to the levels of risk.

We’re favoring domestic assets in the BlackRock Multi-Asset Income Fund. After reducing exposure to covered calls in July to mitigate risk during earnings season, we increased the fund’s allocation in August as attractive option-writing opportunities emerged. We remain conservatively positioned relative to the risk benchmark and well diversified across fixed income.

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