Market review
Love and drama is in the air on Wall Street, with nostalgic investors rekindling their romance with AI-fueled megacap tech stocks and abruptly ending a brief but passionate year-end tryst with mid-and small-cap stocks. Major US stock indices swooned to record highs but sent mixed signals into month-end, with strong economic data instigating more hawkish undertones from the Fed. The sultry holiday rally in bonds fizzled accordingly, as fickle futures markets dumped their most ambitious rate cut expectations from just a few weeks earlier. Despite China’s efforts to woo investors with promises of stimulus, skeptical traders were unimpressed and outright ghosted Emerging Market stocks, crushing prices lower over the month after further revelations of deteriorating economic activity.
Market performance: January 2024
On… the thorny inflation print that pricked market sentiment:
“The Valentine’s Day eve CPI print came in hot and steamy and sparked the largest sell off in stocks of 2024. Has this print changed our views? Are we worried? Nah, not really. We remain of the view that inflation will continue to ease, even if we see another month or two of superficially “hot” prints (which could surely bring with it increased market volatility).” – Michael Gates, Managing Director, BlackRock
Asset class views
Source: BlackRock as of 1/31/2024, Views are subject to change
We are overweight U.S. stocks, leaning into tech and large cap companies with the most resilient businesses and robust earnings growth, with an increase to value-oriented stocks based on strong earnings surprise momentum. We are overweight U.S. treasuries with a barbell preference for short-(floating rate) and long-duration nominals, with complementary exposure to Treasury Inflation Protected Securities to take advantage of potentially falling real rates.
We maintain near benchmark-weight in emerging market bonds in fixed income-heavy models due to attractive yields and potential softening dollar strength. We recalibrate growth/value factor positioning, maintaining a targeted preference for tech stocks but unwinding other broad growth-oriented bets as value-centric 2023 losers potentially come back into fashion. We are generally neutral on US high yield bonds, with a targeted tilt toward higher quality and attractively valued issues.
We are underweight international developed market equities due to sluggish relative corporate earnings signals and more pronounced downside vulnerability to potential geopolitical turmoil. We remain underweight emerging market stocks but with a carved-out preference for those countries with the most attractive earnings and economic growth prospects (like India and Taiwan) and purposefully limiting exposure to China. We hold close to benchmark exposure to investment grade credit and mortgage-backed securities, increasing exposure to a freshly embedded active fixed income strategy capable of generating attractive yields and swiftly adjusting to changing market conditions.
