With $6.44 trillion in assets under management, Blackrock is the world’s largest investment management corporation and, as such, it has the ability to seriously influence the direction of a particular market. Accordingly, research produced by this asset manager is valuable not only because it can provide useful guidance for what the market will do in the future, but also because it serves as a signpost for the course that the company itself may take going forward.
While what some of what the research desks produce can seem distant and esoteric to the average retail investor, they do often make concrete forecasts for equity markets that are useful to individuals. The Blackrock Investment Institute sees the global economy slowing down, but still growing.
US: No longer the growth driver
“The two factors that drove US outperformance in 2018 - fiscal stimulus and business investment - are set to fade this year, in our view. The growth kick from fiscal stimulus - an unusual late-cycle booster via corporate tax cuts and greater government spending - has likely peaked ... Greater uncertainty around protectionist trade policies and supply chain relocations, as well as much tighter financial conditions, will temper the capital spending plans of US corporates.”
Given that major indices like the S&P 500, Dow Jones and Nasdaq provided negative year-end returns in 2018, hearing that the effect of fiscal stimulus is fading may spook some investors. Will 2019 be even worse than 2018? The report goes on to mention “another drag: the likely compression of U.S. corporate profit margins from current historically high levels as wage costs rise and pricing power remains tepid.” This combination of trade war uncertainty and rising costs are likely to impact earnings negatively, putting a dampener on returns for investors.
Limited risk of U.S. recession -- for now
However, Blackrock also thinks that the markets are being too pessimistic, which may imply some surprise upside for investors. The asset management giant is not forecasting a recession this year; rather, it sees the economy entering a late phase of the business cycle:
“Our work suggests the US economy was already approaching the late-cycle phase last year. On the current trajectory, it will enter the late-cycle phase during the first half of 2019 as labour market slack and the output gap suggest greater overheating...The key question is how long this late-stage cycle might last. The tipping point that pushes an expansion into a recession tends to be triggered by a central bank tightening policy too much - perhaps due to hotter inflation - or a build-up of financial vulnerabilities.”
So there are two distinct scenarios that could see the market enter a downturn in the near future. The Federal Reserve sticking to its stated aim of two rate hikes in 2019 might prove to be a catalyst for one such scenario. Notably, Blackrock states elsewhere in the report that they think this is unlikely given that “central banks do not need to respond aggressively to inflation pressures. This gives them flexibility to maintain easy monetary conditions.”
The second scenario could be precipitated by some sort of systemic shock to the system. While no one knows exactly where such a shock might come from (as is the nature of such events), a possible candidate is a "no-bid" scenario in the capital markets, in which a lack of demand for corporate debt leads to a liquidity crisis -- essentially a run on the bond market. While scenarios like these seem -- and are -- far-fetched, they are not completely implausible.
Summary
Retail investors and households may take some comfort in knowing that the world’s largest asset manager is not currently forecasting a recession in 2019. But be aware that it is also looking intently for leading indicators that we may be tipping into one.
Disclosure: The author owns no stocks mentioned.
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