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Investment Commentary

 

A Message From BlackRock's Investment Team*

Michael Fredericks, Managing Director – December 31, 2019



Q4 | 2019 Key Points From the Quarter

U.S. stocks hit fresh highs

The S&P 500 delivered its best return since 2013, while the tech-heavy NASDAQ hit 9,000 for the first time.

Geopolitical challenges subsided

The U.S. and China announced a preliminary trade agreement, while the UK election provided some Brexit clarity.

Third interest rate cut of the year

With monetary policy likely on hold, what will key market drivers be in 2020?


Within the BlackRock® Diversified Income Portfolio1, we focus on our core objectives:

  • uncovering attractive income opportunities around the globe
  • actively managing portfolio volatility as market conditions change
  • helping you meet your future financial goals

Asset Class Recap

Domestic stocks

  • US stocks2 delivered the fourth consecutive quarter of positive returns.
  • Dividend-paying stocks were positive but generally lagged the broader market.

Foreign stocks

  • Developed markets broadly performed in-line with domestic stocks.
  • Emerging markets outperformed as riskier areas of the market led.

Bonds

  • While short-term interest rates fell due to central bank easing, intermediate and longer-term interest rates rose, as the global economic backdrop improved. These higher rates weighed on investment bond returns.
  • Lower-quality bonds generally outperformed higher quality bonds.

Global markets ended the year on a high note, supported by a host of positive catalysts:

  • The Federal Reserve cut short-term interest rates for the third time in 2019, nearly undoing the four hikes in 2018. This helped offset the effect of rising trade tensions at the time.
  • A convincing outcome to the British election set the stage for lawmakers to trigger a split with the European Union. This removed uncertainty that has weighed on sentiment for more than three years.
  • Possibly most noteworthy was the announcement of an initial U.S./China trade deal. Details are still to be announced but markets reacted favorably. Both domestic and international stocks moved higher. China also reported stronger than expected economic data. This gave markets confidence that the world’s second largest economy may be finding solid footing.
  • Global economic data remains mixed, but we see evidence of stabilization. The U.S. consumer remains resilient, with retail sales, housing data, and job growth still at attractive levels. European growth is lackluster, but economic data in key areas is stabilizing and improving. In addition, the easing of trade tensions and a weaker dollar could benefit emerging markets.

Cautious optimism: A look towards growth for 2020


During the quarter, we made the following changes to the Portfolio:

  • Reduced exposure to shorter-term investment grade bonds in favor of high-quality, AAA-rated mortgage-backed securities. We believed opportunities in mortgages are more attractive.
  • Increased exposure to European stocks and reduced exposure to cash and shorter-term, investment-grade bonds. We believed weak sentiment towards Europe may be too pessimistic. Favorable trade discussions and resilient global growth has reduced the probability of a near-term recession, supporting a small increase in risk.

The current market environment marks a shift from the conditions of 2019. Last year central banks cut interest rates to help offset the negative effect of rising trade tensions. This was an unusual move in a late cycle environment. However, the pivot towards lowering rates looks to be over for now. We believe this makes growth the key support needed for markets in 2020.

We anticipate a mild pickup in growth supported by easy financial conditions which may aid manufacturing activity and rate-sensitive sectors such as housing. However, risks such as an unexpected rise in inflation or growth flatlining are real possibilities. We are also closely watching developments in the Middle East, while trade tensions could easily reignite. Therefore, we are cautiously optimistic but remain level-headed.

We added some risk during the quarter but still maintain modest levels of risk in the Portfolio

Three key investment themes that are helping shape our positioning may play out in the coming months:

  • Growth may edge up: Central bank intervention in 2019 has led to easier financial conditions which could start filtering through to the global economy.
  • Policy pause: We see economic fundamentals driving markets in 2020, with less risk from trade tensions and less scope for monetary easing (lowering rates) or fiscal stimulus. Major central banks appear intent on maintaining easy policies, and interest rates and bond yields look likely to linger near lows.
  • Maintaining resilience: Even at lower yields, we believe high quality fixed income offers potential ballast in stock market selloffs. So, while we expect growth to pick-up, we balance risk with high quality bond exposures.

We put your goals first

As always, we thank you for the trust you’ve placed in us. Should you have any questions, please be sure to reach out to your Fidelity Representative.