Wall Street is known as the financial capital of the world and is always eager to proffer its views on the state of the capital markets. Now is no exception! Investment firms including Blackrock, Bank of America, Charles Schwab and many others all produce newsletters highlighting their assessments of the current financial situation. Following is a summary from Blackrock’s recent Weekly Commentary where they review where we have been, where we are and where they think we are going!
Blackrock starts with a broad view of the recent capital market performance. A view of the past two years is very instructive as equity and fixed income markets both struggled in 2022, but only some equities have started a recovery into 2023, with bonds still lagging (see chart below). This is a point that D&A has been well-aware and commented on frequently in its recent blog posts.
Blackrock then goes on to review its investment themes for the near term. First, they feel that the Fed is likely to “hold tight” with its inflation fight given the potential for inflation to go on a “rollercoaster ride” into 2024. The investment implication is that income from short-dated U.S. Treasuries likely will continue into 2024.
Second, as we have seen so far in 2023, recent equity performance has been highly segmented with clear winners (mega-cap tech) and losers (small- and mid-cap). It follows from this that high quality investments in both equities and fixed income are favored.
And third, Blackrock coined the phrase “mega forces” to describe structural changes that are poised to create big shifts in profitability across economies and sectors. The mega forces include artificial intelligence (AI), rewired globalization due to geopolitics, transition to a low-carbon economy, aging populations and an evolving financial system. From these trends Blackrock is looking for investing opportunities where AI can make material differences.
In terms of broad tactical directional views (i.e., 6 – 12-month horizon), Blackrock is mostly in a neutral stance with no large over- or underweights in any major asset class. However, some small underweights are listed including U.S. equities and U.S investment grade bonds. Overweights in emerging market (EM) debt are favored due to higher yields in those markets and as EM central banks may be poised to cut rates.
As readers of this blog are well-aware, D&A is a long-term strategic investor favoring broadly diversified exposures, but is aware of market trends and will tilt portfolios to capture incremental returns when situations are warranted. Such is the case in 2023 where excess cash in many portfolios was allocated into short term bonds and U.S. Treasury Bills yielding over 5% (annual); this is likely to continue and be expanded as we move into 2024. Likewise, in some client accounts we have begun to overweight equity allocations into higher quality positions. Of course, each client has unique needs and all positions in all client portfolios are always tailored to these needs.