BlackRock Commentary: Why we stay risk-on in the short term

Wei Li – Global Chief Investment Strategist of BlackRock Investment Institute together with Natalie Gill – Portfolio Strategis , Beata Harasim – Senior Investment Strategist and Yuichi Chigurchi – Head of Multi-Asset Strategist and Chief Investment Strategist in Japan all forming part of the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

Key Points

In support of risk-taking: We see falling inflation, nearing interest rate cuts and solid corporate earnings supporting cheery risk sentiment. We tweak our tactical views and stay pro-risk.

Market backdrop: U.S. stocks hit record highs last week and 10-year yields fell as the Fed stuck with planned rate cuts. Japanese stocks gained on a cautious BOJ policy pivot.

Week ahead: U.S. PCE takes center stage this week. We see goods deflation pulling down overall U.S. inflation for now before inflation resurges in 2025.

Central bank activity last week gave markets the thumbs up to stay upbeat. That keeps us pro-risk in our six- to 12-month tactical views as Q2 starts. We see stock markets looking through recent sticky U.S. inflation and dwindling expectations of Fed rate cuts. Why? Inflation is volatile but falling, Fed rate cuts are on the way and corporate earnings are strong. We stay overweight U.S. stocks but prepare to pivot if resurgent inflation spoils sentiment. We up our overweight on Japanese stocks.

As Q2 kicks off, we still see a more supportive near-term backdrop for risk-taking. U.S. inflation has eased from its pandemic highs and growth has held up. And expectations for S&P 500 earnings growth for 2024 have been revised up to about 11%, LSEG data show. Earnings expectations are even higher for tech companies that markets see leveraging artificial intelligence (AI). See the orange line in the chart. Earnings expectations for the broader market are also on the mend (green line), with sectors except commodities and healthcare seeing earnings recover. Plus, the Federal Reserve reaffirmed its intention to make three quarter-point rate cuts this year, while lifting its growth and inflation forecasts. After the recent Fed signals, we believe the bar is high for market pricing of immaculate disinflation – inflation falling near the Fed’s 2% target while growth holds up – to be challenged.

Against that backdrop, we remain tactically overweight U.S. stocks. We think upbeat risk appetite can broaden out beyond tech as more sectors adopt AI, and as market confidence is buoyed by recent Fed messaging and broadly falling inflation. We still prefer the AI theme even as valuations soar for some tech names. Stock valuations are supported by improving earnings, with the tech sector expected to account for half of this year’s S&P 500 earnings, Bloomberg data show. That has led to a fall in price-to-earnings ratios – share price divided by earnings per share – for some companies, unlike in the dot-com bubble when they soared. To compare the periods, BlackRock’s systematic equities team analyzed 400 metrics related to valuations and other features and found that the number flashing red now is 50% lower than when the dot-com bubble burst in 2000.

Potential disruptions to our view

What would change our risk-on stance? First, risk appetite being challenged as markets shift focus from cooling inflation to inflation on a rollercoaster back up in 2025. We think it will settle closer to 3% as high wage growth keeps services inflation sticky. Persistent inflation pressures from mega forces, or big structural shifts we see driving returns, also call for a higher neutral rate – the interest rate that neither stokes nor limits economic activity – than in the past. We think the Fed’s nudged-up long-run policy forecasts are starting to reflect our view of rates staying higher for longer than pre-pandemic. Markets are not eyeing that outlook for now. Second, stocks could grow more sensitive to macro news as profit margin pressures mount.

As Q2 kicks off, Japanese equities become our highest-conviction tactical view as solid corporate earnings and shareholder-friendly reforms keep playing out. We add to our overweight because we think the Bank of Japan policy stance is supportive of local markets. The BOJ made clear that ending negative rates is about normalizing policy, not anxiety over inflation, and it pledged to limit spikes in long-term yields. We think the BOJ will act cautiously and not sabotage the return of mild inflation. We also up euro area inflation-liked bonds to neutral as market expectations for persistent inflation have eased.

Our bottom line

We see a supportive risk-taking environment for now, as inflation keeps falling and after the Fed reinforced upbeat sentiment. We stay overweight U.S. stocks and the AI theme. We go further overweight Japanese stocks.

Market backdrop

U.S. stocks climbed to all-time highs last week and U.S. 10-year Treasury yields slipped after the Fed stuck to its plans to cut policy rates three times this year even after lifting both its growth and inflation forecasts for this year. We think markets are underappreciating another change: the Fed nudging up its long-run policy rate. Japan’s Nikkei stock index hit all-time highs after the BOJ ended negative rates and lifted its yield cap. Yields on Japanese 10-year government bonds dipped slightly.

This week, we focus on U.S. PCE data, the Fed’s preferred measure of inflation. We think U.S. inflation can fall further toward 2% this year due to falling goods prices. Yet we see inflation on a rollercoaster back up in 2025, with inflation eventually settling closer to 3%. The Fed appears to be slowly adjusting to this view given its higher projections for policy rates two years out

Week Ahead

March 26: U.S. consumer confidence and durable goods; UK GDP; Japan services PPI

March 29: U.S. PCE

March 31: China manufacturing PMI

BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of 25th March, 2024 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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A Comprehensive Guide to Creating an Effective Household Budget

One of the most common pieces of advice you will hear when trying to find ways to save more money is the need to have an effective household budget. It is true that understanding how much money you earn and how you spend it, will help you work out where you can cut back in order to save. But saying you need to have a budget can often be a lot easier than actually doing it. In this article we will provide some tips on how to create an effective budget that will help you gain control over your finances.

Step 1: Understand Your Income

The first and most important step in creating a household budget is understanding your income. Take into account all sources of income, including salaries, bonuses, freelance work, or any other regular inflows of cash. Make sure to consider the net income, in other words the amount you actually take home after taxes and other deductions.

Step 2: List Your Expenses

To create a comprehensive budget, you must identify and categorise your expenses. Break them down into fixed and variable categories. Fixed expenses include regular bills like mortgage payments or rent, utilities, insurance, and other loan payments. Variable expenses are things like groceries, eating out, entertainment, and other flexible spending.

Step 3: Track Your Spending

For a month, meticulously track every expense. This will give you a clear picture of where your money is going and help you identify areas where you can cut back or reallocate funds. If you need to, use apps or budgeting tools to simplify this process.

Step 4: Categorise and Prioritise

Once you have a month’s worth of spending data, categorise your expenses into non-negotiables (essential), discretionary (optional), and savings. This step helps you prioritise your spending and determine areas where you can adjust.

Step 5: Set Realistic Goals

Whether it’s saving for a holiday, an emergency fund, or paying off debts, set clear and achievable financial goals. Break down larger goals into smaller, manageable steps. This not only motivates you but also makes it easier to integrate these goals into your budget.

Step 6: Create the Budget

Now that you have a clear understanding of your income, expenses, and financial goals, it’s time to create your budget. Allocate a specific amount to each spending category based on your priorities. Ensure that your income covers all your expenses and leaves room for savings and unexpected expenses.

Step 7: Monitor and Adjust

A budget is not a one-time task; it requires regular monitoring and adjustments. Periodically review your budget to ensure you’re staying on track. If you find that you consistently overspend in a particular category, consider adjusting your allocations or finding ways to reduce expenses.

Creating and maintaining a household budget is a vital step towards financial stability and success. By understanding your income, categorising expenses, setting realistic goals, and regularly monitoring your budget, you can take control of your finances and work towards achieving your financial objectives. Remember, a well-crafted budget is a dynamic tool that can adapt to changes in your life and financial circumstances.

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