BlackRock says the market is mispricing these key risks.  Here is his advice on stocks and bonds.

BlackRock says the market is mispricing these key risks. Here is his advice on stocks and bonds.

Wall Street is on a five-day losing streak. The decline, as measured by the S&P 500 SPX,
3.6% isn’t so great, but it seems hopelessly inevitable once the benchmark fails to hold above its 200-day moving average.

The relapse of every rally in 2022 is recognition that equities’ relationship with central banks has changed. Once supportive, their fight against inflation has put pressure on equities and made markets more volatile.

Our call of the day comes from BlackRock BLK,
who say that this difficult macroeconomic scenario will continue and that investors need a new three-pronged strategy to deal with it.

“The new macro diet is playing out. We believe this requires a dynamic new playbook based on views of market risk appetite and macroeconomic damage pricing,” says the BlackRock Investment Institute team led by Jean Boivin.

First, let’s take a quick look at why, unlike more optimistic Federal Reserve watchers, BlackRock believes the US central bank won’t be offering much help to investors anytime soon.

This is basically because the higher interest rates that central banks use to combat high price increases over several decades cannot solve the inflationary supply problems caused by limited production capacity, as shown the graph below.

Source: BlackRock

“This means that the only way for central banks to get inflation back on target is to raise rates enough to crush demand (orange line) to the level the economy can comfortably support. That’s fine. below the pre-Covid growth trend (yellow line).Central banks appear determined to do “whatever it takes” to fight inflation, presaging recession, in our view,” says BlackRock.

Stocks still don’t fully reflect the damage to come, so BlackRock is underweight. And here’s what investors should do.

First, it is important to constantly reassess how much of the economic damage caused by central banks is passed on to the market. Be aware that problems are piling up in rate-sensitive sectors like housing; consumer savings are running out; while CEO confidence deteriorates and leads to lower capital spending. In Europe, the energy shock is wreaking havoc.

The investment implication: “We are tactically underweight developed market equities. They are not pricing the recession that we are forecasting,” says BlackRock. However, a sector such as health remains attractive.

Next, investors should “rethink bonds.” As investors know, yields are now much more attractive than they have been for many years, but it is important to differentiate.

“The case for investment-grade credit has become clearer, in our view. We believe it can hold its own in a recession, as companies have strengthened their balance sheets by refinancing debt at lower yields. to agency mortgages can also play a diversified income role. Short-term government debt also looks attractive given current yields,” says BlackRock.

But beware of long-term government securities, because unlike in the past, they may not protect a portfolio from recession.

“The negative correlation between stock and bond returns has already reversed, meaning they can both fall at the same time. Why? Central banks are unlikely to come to the rescue with cuts rapid rates in the recessions they engineered to drive inflation back to policy targets. On the contrary, policy rates could stay higher for longer than the market expects.”

Finally, investors must learn to live with inflation. The policy of inflation will turn into a policy of recession and the Fed will be able to stop raising rates without inflation being on track to return to the 2% target, estimates BlackRock.

This means that inflation can be consistently above target even after the onset of the recession, compounded by lingering supply constraints as populations age, geopolitical fragmentation rages and carbon shifts away. cause difficulties.

“We are overweight inflation-linked bonds on a tactical and strategic horizon,” concludes BlackRock.

Related: Where BlackRock sees “huge opportunities” in ETFs


S&P 500 ES00 futures,
rose 0.1% to 3941 as the 10-year Treasury yields TMUBMUSD10Y,
climbed 2.7 basis points to 3.452%. The DXY dollar index,
added 0.3% to $105.39 and US crude futures CL.1,
rose 0.6% to $72.45 a barrel.

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The buzz

Shares in Wynn Resorts WYNN,
and Las Vegas Sands LVS,
are both up around 4% on hopes Macau casinos will get a boost from China easing COVID restrictions.

The yield curve for 2- to 10-year Treasuries remains inverted by more than 80 basis points — the most since the early 1980s — as market prices slump and Federal Reserve rates rise . Data on ex-factory prices will be published on Friday, consumer prices next week.

Federal prosecutors are investigating whether FTX founder Sam Bankman-Fried manipulated the price of two cryptocurrencies, according to a report.

It’s pretty thin in terms of new economic data on Thursday, with only the weekly jobless claims report due at 8:30 a.m. EST.

GameStop shares GME,
are up 4% in premarket trading, recouping much of the previous session’s decline, as investors shrugged off third-quarter results, after Wednesday’s closing bell, which missed forecasts for earnings analysts.

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Tired of political risk volatility? Trading made tortuous by the anguish of the ballot box? Here’s some good news from Deutsche Bank strategist Jim Reid:

“Barring an early election, 2023 will be the first year in the 21st century without a general or presidential election in any G7 country. You may think this is just a minor point to point out, but with these countries all in very difficult situations right now (pending recessions, high inflation, energy problems and a cost of living crisis), elections can be a lightning rod for uncertainty. “

“So as we head into a potentially challenging 2023, perhaps political stability can be a silver lining”

Source: Deutsche Bank

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