Stock and bond markets seem to
be telling two different stories.
Stocks delivered positive returns for the third consecutive month in March, although the ride to get there was noticeably bumpier as global growth concerns weighed on sentiment. A very dovish Federal Reserve meeting led to a sharp decline in longer-term Treasury yields and an inverted yield curve for the first time since 2007, further stoking investor speculation over an impending recession.
The Fed’s current stance represents a stark shift from just months ago when the Fed seemed to be on auto-pilot and expectations were for multiple rate hikes in 2019 and 2020. Now, the odds for a rate cut in 2019 are higher than the odds of a rate hike.
Ultimately, it seems like the markets may be telling two contrasting stories – with rising stock prices suggesting continued growth and rising bond prices signaling expectations for recession. While growth is indeed moderating, we view this as a reversion back to levels seen for much of this economic cycle and not something more sinister. Higher growth in 2018 was largely driven by U.S. tax reform, the effects of which are gradually wearing off. The threat of a near-term recession is low, in our view. Fundamentals remain supportive, major central banks remain accommodative, and policy stimulus in China should support continued positive growth, albeit at lower levels.
Our base case remains cautiously positive. While an inverted yield curve is generally viewed as a recession precursor, it has historically been a poor indicator of recession timing. That said, we recognize that risk assets are generally back to levels seen before the year-end selloff and therefore we believe it’s prudent to trim some risk and build resilience. In the BlackRock Multi-Asset Income Fund, we maintain a modestly lower level of equity risk and a slightly longer duration profile, while seeking opportunities to improve credit quality.
