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Portfolio > Economy & Markets

BlackRock: Recession Coming, Not Priced Into Stocks Yet

By Dinah Wisenberg Brin

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What You Need to Know

  • Inflation will stay above 2%, BlackRock predicts.
  • The firm is underweight developed market stocks for now.
  • BlackRock's high-grade credit picks include short-term government bonds.

Stock prices don’t yet reflect the coming economic downturn as central banks purposely seek to cause recessions to tame inflation, BlackRock Investment Institute said in its recent 2023 global outlook.

“A recession is foretold,” the firm said, noting it is underweight developed market equities for now as central banks move to overtighten monetary policy. Corporate earnings expectations haven’t priced in even a mild recession, BlackRock added.

The four-decade “great moderation” marked by mostly stable activity and inflation is done, replaced by a new regime with more market and macroeconomic volatility, BlackRock analysts wrote.

“We expect to turn more positive on risk assets at some point in 2023 — but we are not there yet,” they wrote. “And when we get there, we don’t see the sustained bull markets of the past. That’s why a new investment playbook is needed.”

That playbook involves more frequent portfolio changes by balancing views on risk appetite with estimates of how markets are pricing in economic damage, and for taking more granular views on sectors, regions and sub-asset classes rather than on broad exposures, the firm said.

Contrary to what investors long expected, central bankers won’t ride to the rescue when growth slows, according to BlackRock.

“They are deliberately causing recessions by overtightening policy to try to rein in inflation. That makes recession foretold. We see central banks eventually backing off from rate hikes as the economic damage becomes reality. We expect inflation to cool but stay persistently higher than central bank targets of 2%,” the team said.

“Equity valuations don’t yet reflect the damage ahead, in our view,” they added. “We will turn positive on equities when we think the damage is priced or our view of market risk sentiment changes. Yet we won’t see this as a prelude to another decade-long bull market in stocks and bonds.”

The new landscape also calls for rethinking bonds, with higher yields a benefit for investors seeking income, according to BlackRock, which prefers short-term government bonds and mortgage securities.

“We favor high-grade credit as we see it compensating for recession risks. On the other hand, we think long-term government bonds won’t play their traditional role as portfolio diversifiers due to persistent inflation,” with investors demanding higher compensation for owning them, BlackRock analysts wrote.

“We see long-term drivers of the new regime such as aging workforces keeping inflation above pre-pandemic levels,“ according to the analysts. “We stay overweight inflation-linked bonds on both a tactical and strategic horizon as a result.”

Image: Shutterstock

Dinah Wisenberg Brin

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