Can stocks still grind higher? And 2 more questions for Q4

For the most part, it’s been a good year for U.S. equities. We’ve so far seen only two down months in 2019―May and August. Both of these happened to coincide with escalating U.S.-China trade tensions. The ebbs and flows on this front are likely to remain a market-moving force and source of uncertainty for investors.

I’d like to tackle three more question marks that may have investors scratching their heads in the year’s final quarter:

1. Are the good times (nearly) gone for U.S. stocks in this cycle?

We don’t think so. We see similarities between the current moment and 2016: Investors are feeling uncertain about the economy, rates have dropped and a contentious U.S. election is brewing. We had an industrial recession then while the consumer was strong. We can check both of those boxes for 2019. One new dynamic: trade war.

In hindsight, 2016 was a classic mid-cycle slowdown. We think 2019 could be similar but acknowledge this time could be riskier simply because the cycle is older and the economy has less slack to offer a buffer. Yet we don’t see this as the end of the economic expansion―or equity gains. End of cycle is usually marked by spiking commodity prices, wages that are rising too quickly, and the Fed lifting rates to avert economic overheating. None of these are evident today. In fact, it’s just the opposite. One potential upshot: A continuation of slow growth and a stock market that can grind higher.

While we see little reason to call in life support on the current market and economic cycle, despite its advanced age, we do believe now it a good time to focus on quality in equities and aim to enhance portfolio resilience.

2. What is the yield curve telling equity investors?

Bond markets are sending mixed messages. Low yields (and high bond prices) are generally a sign of economic pessimism. Yet they normally come with a widening of spreads between lower- and higher-quality bonds. Not so today. The yield spread between U.S. Treasuries and riskier high yield bonds has been relatively contained, sitting below 4% throughout October. This compares to a 25-year average of 5%, and is well below levels seen during the 2001 tech bubble and 2008 financial crisis.

Brief yield curve inversions, such as the episode in August, could be more anomaly than omen. Part of the reason for the curve inversion could be less about the U.S. specifically and more a reaction to very low (even negative) yields globally. Even if the curve were sending ominous signals, it historically has been an imperfect timing indicator. Leading into the last five recessions, the 2- to 10-year curve was inverted for an average of 22 months before recession hit, according to research from Credit Suisse. And that interim period (between inversion and recession) has not necessarily been bad for equities. The study found U.S. stocks rose an average of 15%-16% in the 18 months following curve inversions, though the range of outcomes was wide at -11% to +30%.

3. Where should I look for income in a low-rate world?

Bonds historically have offered investors higher yields and lower realized volatility than stocks. Today is different, as shown in the charts below, making stocks an attractive income proposition.

Utilities and REITs, historically stable income providers and classic bond proxies, have high valuations today―consistent with higher bond prices. We prefer to seek income in less rate-sensitive areas of the market that also have potential to grow. Health care, for example, can see sustained growth from an aging population. The sector is further bolstered by consistent innovation and resilient spending to support it. We also see potential in U.S. banks, where stock prices are already reflecting a recession. That means any whiff of good news could see those prices get a lift.

Tony DeSpirito is Director of Investments for U.S. Fundamental Active Equity and a regular contributor to The Blog.

Investing involves risk, including possible loss of principal.

There is no guarantee that stocks or stock funds will continue to pay dividends.

BlackRock Equity Dividend Fund is actively managed and its characteristics will vary. Stock and bond values fluctuate in price so the value of your investment can go down depending on market conditions. International investing involves special risks including, but not limited to, political risks, currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets.

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 October 2019 and may change as subsequent conditions vary. The information and opinions contained in this post 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 post 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 post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

You should consider the investment objectives, risks, charges and expenses of any BlackRock mutual fund carefully before investing. The prospectus and, if available, the summary prospectus contain this and other information about the fund and are available, along with information on other BlackRock funds, by calling 800-882-0052 or from your financial professional. The prospectus should be read carefully before investing.

Prepared by BlackRock Investments, LLC, member FINRA.

©2019 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other marks are the property of their respective owners.

USRMH1019U-981586-1/1