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We’ve reached the end of Q1, which means it’s time for our second Burnham’s Blueprint. Read below for insights on the current state of the economy and what we’re looking at over the next couple of months.
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Here’s a good reminder if you find yourself wondering: is now the time to stay invested?
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We are excited to introduce our first Burnham’s Blueprint, a financial market touchpoint using up and coming industry trends, data and updates to prepare you for the months and year ahead. Burnham’s Blueprint will be published quarterly, touching on all sides of the domestic and global markets, ranging from consumer spending to recession probabilities. Let’s dive in!
If you have trouble viewing the blueprint below, try our pdf here.
Market volatility has returned, and we are monitoring events closely. Jitters have been driven by a confluence of events (fears of a Fed policy mistake & renewed recession worries chief among them) and exacerbated by the interconnectedness of global capital markets. A primary culprit for the sloppiness of recent price action appears to be the collapse of the so-called ‘yen carry trade’ and the corresponding forced unwind of levered, speculative bets in heavily crowded positions. Markets are moving fast but our disciplined process helps prevent us from being led astray by short-term volatility. Small caps rallied over 15% in July – led by the junkiest names – only to give it all back in just a handful of trading days in August. We are earnings focused and the fundamentals of large US growth stocks remain solid absolutely and relative to alternatives. Despite mixed headlines, Q2 earnings results have been mostly encouraging thus far, and we note that AI capex spend is at full-throttle, slowed by capacity only. Credit spreads finally widened but remain tight and long-duration US treasuries are rallying, returning to their traditional role as a source of resilience amidst anxious markets. We note too that the US dollar is *not* rallying, suggesting something other than a “the world is truly ending” panic. This appears consistent with any ordinary ‘growth scare’ but non-recessionary-driven equity correction, particularly given the context of such a hot start to the year. As the earnings, inflation, and unemployment picture continues to evolve, we remain ready and willing to adjust the portfolio, as necessary.
View are subject to change
US stocks staged an impressive revenge rebound after their brief slump in April, leaving the pessimistic ‘sell in May and go away’ crowd in tears. Comeback catalysts included another round of earnings surprises from the Mega-Cap tech juggernauts and a bouquet of ‘goldilocks’ economic reports that collectively hinted at an optimal mix of moderating growth. Emerging markets (EM) again underperformed Developed Markets, but an earnings-fueled rebound by AI and semiconductors stocks in Taiwan and South Korea gave EM stocks some much needed support. The timing and extent of potential interest rate moves in the US continued to cast a shadow over bonds, yet a modest reversal in recent hawkish Fed talk helped provide some relief as Chair Powell pushed back against the rumbling speculation of possible future rate hikes. Yields across fixed income inched lower, with longer duration and higher quality bonds outperforming the most.
“May’s economic data dealt a brutal hand to the ‘sticky’ inflation narrative, with CPI, PPI, & import price readings all coming in below consensus market expectations. Even the so called stickiest components of core CPI came in noticeably weaker. Sure, Chair Powell’s preaching patience, saying one bad beat doesn’t mean the game’s over – but high inventories and a softening jobs market have started to put downward pressure on prices. Across consumer sectors, from bling to burgers, recent data suggests companies have become increasingly vulnerable to price cuts. Just look at autos – five straight months of falling prices.¹ We believe this broader unwind of inflation could pick up steam.” – Brett Wager, Market Strategist, BlackRock
After a steady three-week pullback that eclipsed 5%, US stocks staged a heroic rebound toward the end of the month, according to Bloomberg. Nervous investors wiped their brow as strong Q1 earnings reports from Mega-Cap tech companies helped prop up the market despite an increasingly consensus opinion that interest rates could stay higher for longer. The hawkish lean in market sentiment propelled yields higher, with 10-year Treasuries closing the month above 4.6%. Small caps’ outsized sensitivity to interest rates caused them to underperform their large cap counterparts once again. Commodities and energy stocks outperformed but lost momentum as progress toward a cease-fire in the conflict in the Middle East made headlines. Japanese stocks gave up March’s gains and retraced lower but stabilized in conjunction with the yen on speculation of central bank intervention. Emerging markets (EM) eked out a modest gain, thanks to strength in commodities and growing investor appetite for beaten-down Chinese stocks.
“Nearly 80% of S&P 500 companies have thus far beaten Q1 consensus EPS expectations¹, outpacing the post-pandemic average of 78%. Technology companies also continued to deliver, impressively surpassing ever-loftier expectations. Earnings growth for small cap companies on the other hand are trending slightly better than the -11.4% expected at the kickoff of earnings season, but well behind the positive growth that was expected at the beginning of the year.” – Brett Wager, Market Strategist
US stocks sprouted to new record highs over the month, feeding on the stimulative nutrients of robust corporate earnings, moderating inflation pressures, and a more resilient-than-expected economy. The persistent strength of underlying economic data stoked hopes of an elusive soft landing but also emboldened Fed officials to begin to renege on some of their dovish December projections. Traders pruned their 2024 rate cuts bets from around six to now fewer than three, leading bond prices to wilt under the heat of a more hawkish outlook. Conversely, oil prices gushed higher, which Bloomberg attributed to simmering geopolitical tensions and OPEC supply cuts. Gold also glittered to record highs, potentially reflecting at least some brewing investor nervousness. Japan poetically stood out like a cherry blossom in full bloom, with local stocks finally eclipsing late-1980s all-time-highs amidst the backdrop of a strategic pivot away from its decade-long accommodative monetary policy. Emerging market (EM) stocks once again lagged, as China’s economic prospects remained overcast.
“This week’s CPI print came in above consensus economist expectations and has once again spooked stock and bond markets – but not us (at least not yet). As we’ve mentioned several times this year, our baseline expectations baked-in the strong possibility of at least a handful of inflation prints surprising to the upside over the early spring period as 3-years’ worth of inflationary impulses continue to work their way through the economy. The most troublesome remaining categories still holding on to elevated levels of inflation have been mostly contained to notoriously backward-looking components. This print is no exception. 35% of the CPI basket is now experiencing <3% inflation, with auto insurance accounting for nearly the entire upside surprise this month. This is a sub-component that is hardly controllable by raising or cutting rates. While markets remain nervous on the path and timing of rate cuts, the biggest victim of changes in the expected policy path is the long-willed “broadening” trade. Absent a re-rating in valuations from the macro side we will continue to focus our positioning on earnings. We expect our underweight positions in small cap stocks and bonds and overweight positions in tech and growth stocks to continue to outperform.” – Michael Gates, Managing Director, BlackRock
We are overweight U.S. stocks, leaning into quality large cap tech companies with the most resilient businesses, robust earnings growth, and upwards earnings revisions. We are modestly overweight emerging market government bonds, which have attractive relative yields and historically benefit during periods of easing monetary policy and falling inflation.
We are generally neutral on U.S. treasuries with exposure across the short-, belly, and long-end of the curve, and maintain complementary exposure to Treasury Inflation Protected Securities. We express a clear preference for quality-factor stocks and recalibrate our growth/value bets to lean more heavily into tech and growth-oriented stocks – but maintain tactical exposure to value-centric companies that may outperform in a higher-rate environment. 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.
Sluggish corporate earnings and more pronounced downside vulnerability to geopolitical turmoil and energy prices make international DM equities less attractive. We diversified our exposure with a currency-hedged position to protect against a stronger dollar and interest rate differentials remaining wide. We maintain a strategic tilt away from China and toward EM countries with more attractive earnings and long-term economic growth prospects (like India and Taiwan). We are marginally underweight US high yield bonds, with exposure to speculative grade issues primarily though actively managed income-focused strategies and added exposure to convertible bonds.
It was a highlight reel month for stocks – juking typical seasonal patterns of weaknesses – while bonds stayed confined mostly to the sidelines. Heavy favorite growth and tech stocks once again scored impressive gains, turning in back-to-back months of MVP performances after a superbly dominant earnings season. Underdog emerging markets stocks rebounded to the upside after a shaky start to the year, benefiting from some strategic stimulative assists from the Chinese government. US inflation data surprised markets with a higher-than-expected print and pushed some investors to rethink their bets on interest rate cuts, leading to some pressure on Treasury prices. Less rate-sensitive high yield bonds outperformed their investment grade peers, closing the month marginally positive on the year.
“Sales, earnings, and forward guidance from some of the largest names in tech have crushed even the loftiest expectations. Subsequent price moves higher have been noteworthy, but these stocks have arguably gotten cheaper, as their prowess at cashflow generation outpaces their current corresponding price appreciation. This adds fuel to our bullishness, persuading us to tilt more aggressively into growth over value and into the names that are driving earnings.” – Michael Gates, Managing Director, BlackRock
Source: BlackRock as of 3/1/2024, 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.
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.
“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
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.
