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BlackRock Downgrades Global Stocks – Time For Caution

BlackRock Downgrades Global Stocks – Time For Caution by BlackRock

Key points

  • We have downgraded global stocks. U.S. valuations are elevated and a mid-year Federal Reserve (Fed) rate increase appears more likely.
  • Rising expectations of a June or July Fed rate increase sent U.S. Treasury yields higher last week.
  • We see the odds of a summer Fed rate increase rising if U.S. data this week show solid jobs gains, rising wages and an inflation pickup.

We have downgraded global equities to neutral, following a meeting of the BlackRock investors behind our views. The growing likelihood of an imminent Fed rate increase and more elevated U.S. valuations warrant short-term caution.

Global Stocks

The chart above shows how U.S. stocks have been in a sweet spot since mid-February, supported by solid economic growth and falling real yields on the back of expectations of a Fed on hold. Yet yields have started rising again. Higher U.S. inflation and hawkish Fed comments have now put a summer rate increase back on the table, increasing investor anxiety and the likelihood of near-term volatility.

Global stocks look vulnerable

Equities no longer look cheap. The MSCI World Index is up 14% from its mid-February low, as stocks have shaken off fears of a global recession, an oil-price collapse and a Chinese currency devaluation.

U.S. equity valuations sit around the 70th percentile of their long-term historical range, according to our calculations. And stocks overall appear more vulnerable to short-term risks. These include a Fed that increases rates too aggressively, a Brexit, a worsening European immigration crisis and a slowdown in global growth. We also see less upside to China’s growth expectations after a recent uptick in activity, and oil prices have rebounded a long way and now reflect improved fundamentals.

We have downgraded U.S. and European stocks to neutral. We do prefer stocks to government bonds, and within equities, we like global dividend-growth and quality stocks. We expect the Fed to raise rates once or twice this year. We also see the potential for a corporate earnings recovery later in 2016. What would make us more bullish? Evidence of reflation, and an emphasis on expansionary fiscal policy and structural reform over monetary policy globally.

Week in review

  • Global stocks advanced, led by Europe after Greece’s creditors came to an aid agreement. U.K. stocks and the sterling rallied after polls implied a decreased likelihood of a Brexit.
  • Oil prices climbed to a seven-month high near $50 a barrel, as U.S. daily crude production slipped to the lowest level since 2014.
  • The U.S. yield curve flattened. The spread between 30- and 5-year Treasury yields briefly hit year-to-date lows on rising expectations of Fed tightening.

Global snapshot

Weekly and 12-Month performance of selected assets

Global Stocks

Week ahead

Date: Event
May 31 U.S. Personal Income and Outlays, including Personal Consumption Expenditures (PCE) Price Index; eurozone inflation
June 1 U.S. ISM Manufacturing Index; China PMI data
June 2 European Central Bank (ECB) meeting and press conference
June 3 U.S. Employment Situation, ISM Non-Manufacturing Index

The focus this week: the Fed. This week brings the release of key U.S. economic reports likely to inform the data-dependent Fed’s decision at its June 14-15 policy meeting. Steady job creation and wage gains alongside a further pick-up in the PCE Price Index would likely raise the odds of a mid-year rate increase.

ECB economic projections could provide clues about the central bank’s confidence in meeting its inflation goal.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

Global Stocks