Researchers at BlackRock, the world’s largest asset manager, have turned neutral on developed-market stocks like those of the U.S. and say they see no catalyst for a sustained rebound in assets perceived as risky right now.
The comments, contained in a note Monday from the BlackRock Investment Institute, came as all three major U.S. stock indexes attempted to stage a comeback from their longest streak of weekly loses in years. In morning trading, Dow industrials DJIA were up by more than 600 points, or 2%, while the S&P 500 index SPX rose 1.5% and the Nasdaq Composite COMP was 0.7% higher.
One of the biggest factors weighing on the institute’s thinking is the Federal Reserve’s intent to tame inflation, now running at a four-decade high. Data released later this week should shed more light on policy makers’ thinking and the pressures holding back the U.S. economy —- starting with minutes of the Fed’s May 3-4 meeting on Wednesday, and Friday’s data on the Fed’s preferred measure of price pressures, the core personal-consumption expenditures price index, for April.
“We cut developed market (DM) equities to neutral on a risk of the Fed talking
itself into overtightening policy and China adding to a weaker global outlook,” Jean Boivin, head of the institute, and others wrote in the note. Though stocks have recently dropped on fears that higher interest rates will lead to a growth slowdown, “we see a brighter picture, but this may not become clear for months.”
“The Federal Reserve signaled its focus is on taming inflation without flagging the
big economic costs this will entail,” they said. “As long as this is the case and markets believe it, we don’t see the basis for a sustained rebound in risk assets.” Nonetheless, they said they expect the Fed to consider the costs to growth, especially if inflation cools, and a dovish pivot by the central bank this year.
Meanwhile, China’s slowdown, which is starting to rival its 2020 shock, is set to ripple across the globe —- reducing growth in major economies and pushing up developed-market inflation “at a very inopportune time.”
Sources: BlackRock Investment Institute, S&P Global, Caixin, Refinitiv Datastream
New York-based BlackRock managed $9.6 trillion as of March. Its latest commentary marks a shift in tone since August, when the institute said it saw a “real and broadening” restart of the global economy under way. Two weeks ago, the institute pared its risk profile, saying it saw little chance of a “perfect” outcome amid a worsening macroeconomic outlook.