2018 started out innocently enough, with the positive effect of President Donald Trump’s tax law lifting stocks to record highs.
But the path since then has been anything but smooth as volatility and macro uncertainty have taken hold of global markets, roiling a wide range of asset classes. In fact, conditions have gotten so bad that both equities and bonds could end the year with negative returns.
With much of the market turbulence transpiring in the fourth quarter, the environment heading into 2019 will be a tricky one to navigate. Luckily for investors seeking guidance, BlackRock is on the case. The firm assembled roughly 100 investment professionals at its 2019 outlook forum to establish a firmwide view for markets.
At the center of BlackRock’s overall approach to handling markets next year is a familiar driver: economic growth. The firm says the performance of assets of all types will largely hinge on whether the economy continues to expand at its current pace.
Beyond that, BlackRock identified three major themes that form the foundation for all of its forecasts, and Business Insider was able to get an exclusive first look at them. Note that the firm’s specific outlooks for stocks and bonds overlap with these themes, which are as follows:
1) A growth slowdown
BlackRock’s view as it pertains to growth is split twofold. The first deals with global economic growth, specifically expansion in gross domestic product. The firm says it expects a slowdown.
The severity, however, will vary by region. BlackRock says the US will outperform its developed-market peers, while the emerging-market bellwether China will stabilize.
“We see US growth stabilizing at a much higher level than other regions, even as the fading effects of domestic fiscal stimulus weigh on year-on-year growth comparisons,” a group led by Richard Turnill, BlackRock’s global chief investment strategist, wrote in a client note. “This underscores our preference for US assets within the developed world.”
BlackRock is also expecting a growth slowdown in corporate earnings. It’s an inevitable comedown, considering profit expansion has been so robust in recent quarters. But it still represents an unfortunate headwind for equities, for which earnings growth is the foremost driver of gains.
With that said, BlackRock once again expects the US to be the best positioned, relative to other geographies. The firm also favors EM companies.
2) A neutral stance from the Federal Reserve
A neutral stance from the Fed essentially refers to one major driver: monetary tightening. As the central bank edges closer to rate levels that neither encourage nor restrict growth, it will affect asset prices far and wide.
And BlackRock says tightening has already started to occur in earnest. The chart below reflects that.
But strategists at BlackRock aren’t as pessimistic as many other experts when it comes to the ultimate impact of tightening. In fact, the firm says the Fed may become cautious with further rate hikes as it approaches neutral, which could actually provide some relief for beleaguered assets.
3) Balancing risk and reward
A third crucial theme identified by BlackRock is constructing a portfolio that allows investors to participate in market upside while also protecting themselves from a potential meltdown.
The firm points to the stock market as a microcosm of this theme. While profit growth has remained strong throughout 2018, equities have struggled over long stretches because of other factors.
BlackRock attributes this to what it calls the “uncertainty effect,” which describes stock returns unexplained by growth. As the chart below shows, this factor has grown over time.
As such, BlackRock recommends a so-called barbelled approach. What does that mean exactly? Allow Turnill & Co. to explain.
It involves “exposures to government debt as a portfolio buffer, twinned with high-conviction allocations to assets that offer attractive risk/return prospects,” he and his colleagues wrote.
Beyond that, when it comes specifically to the equity market, BlackRock likes high-quality stocks. It says quality has “historically outperformed other equity style factors in economic slowdowns.”