After July’s spectacular rally, US stocks SPX, -0.42% have been range bound for the past two weeks as investors struggle to make sense of some of the most confusing economic data in years.
But while the S&P 500 index has held above the key 4,000 mark, thanks largely to a rebound from battered megacap tech stocks like Meta Platforms META and Amazon.com Inc. AMZN, a team of analysts from BlackRock, the global largest money manager, believes investors would be better served with a less exciting, defensively positioned portfolio of “low volatility” stocks and bonds.
This view is based on the notion that hopes of a “Fed Pivot”, in which the US Federal Reserve backs off plans to raise interest rates further, are grossly misplaced amid signs of deteriorating corporate performance and service sector inflation be far more sluggish than investors are currently expecting.
According to BlackRock Gargi Chaudhuri, iShares’ head of investment strategy for the Americas, the wealth management giant’s internal metrics are flashing conflicting signals about the state of the US consumer and corporate sectors.
BlackRock’s proprietary model of the US economy is flashing red flags for corporate performance while consumers remain resilient. Source: BlackRock
But once the market wakes up to the fact that the Fed pivot is still a long way off, stocks could be in danger of reversing part or all of the growth-driven rally seen by the Nasdaq Composite COMP, -1.19% and the Russell 1000 The growth index outperformed RLG, -0.93%, the Dow Jones Industrial Average DJIA, -0.18% and S&P 500 over the past month. While rising costs of energy and other commodities have garnered most of the attention this year, Chaudhuri fears service inflation, like rising housing costs, will take the market by storm by being far more persistent than investors and economists currently expect.
Should this occur, investors are best advised to focus their portfolios on “defensive” assets, including high-quality corporate bonds and low-volatility stocks. Defensive portfolios outperformed in the first six months of 2022 despite both stocks and bonds selling off simultaneously, resulting in one of the worst first halves for markets in decades.
See: Goldman Sachs says it’s too early for markets to trade “a full Fed pivot.”
Some ETFs recommended by Chaudhuri are: iShares MSCI USA Min Vol Factor ETF USMV, -0.05%, iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, -0.45%, iShares US Healthcare Providers ETF IHF, -0 .22% and the iShares 1-5 year investment grade corporate bond ETF IGSB, -0.22%.
BlackRock’s concerns could be felt as early as Tuesday as the tech-heavy Nasdaq Composite led markets lower, driven by falling semiconductor stocks including Nvidia NVDA, -3.97% and Micron Technology Inc. MU, -3.74%. The Nasdaq fell 1.4%. while the S&P 500 was down just 0.6% by comparison.