Investors who are sitting on cash may be missing out on potential gains in stocks and bonds, according to BlackRock. Historical data shows that during the months between the Federal Reserve's last interest-rate hike and its first rate cut, returns from these assets have been higher compared to periods immediately after the first cut.
BlackRock's analysis of the previous five hiking cycles since 1990 reveals that the Fed typically pauses for an average of 10 months before implementing its first rate cut. While the market generally expects a rate cut to boost performance, data suggests that investors could actually be rewarded the most during this pause period.
Despite this opportunity, many investors seem hesitant to take action. Kristy Akullian, a senior iShares investment strategist at BlackRock, explains that there is currently a significant amount of "dry powder" on the sidelines. This demonstrates a lack of urgency among investors to capture potential upside in stocks and bonds as we reach the late stage of the Fed's rate-hiking cycle.
Uncertainty surrounding macroeconomic factors has contributed to this cautious approach. The BlackRock note reveals that global investors have stockpiled cash, leading to money-market fund assets totaling $8.3 trillion worldwide. In fact, this year alone, investors have added a record $1.1 trillion to their cash holdings - the highest allocation since the pandemic.
While investors grapple with questions about higher rates and growth in the coming year, BlackRock's Investment Institute head, Jean Boivin, offers some insight. During a media briefing at the firm's New York headquarters discussing its 2024 outlook, Boivin states that their base case is no longer predicting a recession.
Akullian echoes this sentiment, stating that the market is currently pricing in rate cuts by the Fed that BlackRock believes are too much and too fast. These "big calls" regarding the macroeconomic environment highlight the uncertainties that investors will have to navigate in the near future.
Traders Expect Potential Rate Cuts in March
Traders in the federal-funds-futures market are anticipating potential rate cuts as early as March, according to the CME FedWatch Tool on Tuesday.
Holding "Quality" Companies in Equities
To navigate the equities market, BlackRock recommends holding "quality" companies with strong balance sheets and stable profitability. In order to gain exposure to this type of investment, investors may consider including a "slice of quality" in their core equity holdings. One way to achieve this is through the iShares MSCI USA Quality Factor ETF (QUAL).
Buffered Exchange-Traded Funds for Stability
Given the potential volatility of the market in 2024, buffered exchange-traded funds may serve as a safeguard in an equity portfolio. These funds limit some of the upside potential for returns while offering downside protection. An example of a buffered strategy is the iShares Large Cap Moderate Buffer ETF (IVVM), as highlighted by BlackRock.
Intermediate Durations in Fixed-Income Strategies
Looking ahead to next year, BlackRock suggests that intermediate durations are the "sweet spot" for fixed-income portfolios. One possible option is the iShares 3-7 Year Treasury Bond ETF (IEI). For added diversification, it may be paired with a "core plus strategy" pursued by the actively managed BlackRock Flexible Income ETF (BINC).
Market Update: U.S. Stock Market Mostly Lower
The U.S. stock market closed mostly lower on Tuesday as investors digested fresh economic data indicating a decline in job openings for October. The Dow Jones Industrial Average (DJIA) fell 0.2%, while the S&P 500 (SPX) slipped 0.1% and the Nasdaq Composite (COMP) gained 0.3%.
Sustained Growth for iShares Core U.S. Aggregate Bond ETF
The iShares Core U.S. Aggregate Bond ETF (AGG) experienced a rise of approximately 0.7% on Tuesday afternoon. This increase coincided with a drop in Treasury yields, providing positive momentum for the ETF, according to FactSet data.
Declining Yield on 10-Year Treasury Note
On Tuesday, the yield on the 10-year Treasury note (BX:TMUBMUSD10Y) declined by 11.5 basis points to 4.171%. This marks the lowest rate since August 31 based on 3 p.m. Eastern Time levels, as reported by Dow Jones Market Data. It's essential to note that bond yields and prices tend to move in opposite directions.