Fidelity® Wealth Services
A Message from BlackRock’s Investment Team*
Michael Fredericks, Managing Director — SEPTEMBER 30, 2020
- Market Backdrop: The rebound continued with stocks and bonds ending the quarter higher.
- Performance: Lower quality fixed income outperformed. Meanwhile, dividend-oriented stocks continued to lag the broader markets.
- Positioning: We are seeking attractive opportunities for yield and total return without taking significantly higher risk.
- Outlook: Low interest rates likely mean lower returns on high quality assets.
Within the BlackRock® Diversified Income Portfolio2, 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
Markets moved higher, but so did volatility and uncertainty
- Global economies continued to re-open and investors felt comfortable taking more risk
- The Federal Reserve announced interest rates are likely to stay at zero for some time
- Strong quarter, but weakness in September may indicate we’ll see higher volatility this year
Despite global spikes in new virus cases, the third quarter showed a continued improvement in economic activity, including strong retail sales, a boom in mortgage applications and a robust recovery in manufacturing data.
This signals to us that consumers and businesses are on strong footing relative to earlier expectations. They are supported by accommodative monetary and fiscal policies – which may help US stocks1 move higher. The upcoming U.S. elections bear watching and will almost certainly drive near-term volatility. However, we believe investors should focus instead on opportunities created by an improved global growth backdrop.
Incrementally added to risk
- Added to stock exposure
- Added to high yield bond exposure and diversified income strategies
- Reduced short-term investments, mortgages, and bank loan exposure
In July we modestly increased risk by reducing U.S. dividend stock exposure in favor of European and emerging market stocks. We also increased exposure to high yield bonds and a diversified income fund, which invests in a broad range of income-producing securities. We reduced exposure to bank loans and shorter-term investment grade bonds.
Not long after quarter-end we again modestly added to risk by reducing exposure to shorter-term investment grade bonds and mortgages. Meanwhile, we increased exposure to U.S. dividend growth-oriented stocks and lower quality bonds. We also continued the rotation away from bank loans in favor of high yield bonds. Finally, we introduced a new position in a flexible multi-sector fixed income fund.
Looking for opportunities in a low-rate world
- Interest rates are likely to stay lower for quite some time, putting pressure on income-oriented investors
- Finding attractive opportunities outside of lower-risk bonds without taking significant risk will be crucial to meeting income needs
We believe interest rates will remain low for some time, meaning investors need to look outside of core bonds for opportunities. In September, the U.S. Federal Reserve announced rates would likely remain at zero through at least 2023. Using history as a guide, core bond returns have closely followed Treasury yields. As one example, the yield on the 10-year Treasury was 3.9% in 2010. The annualized return on the Bloomberg Barclays U.S. Aggregate Bond Index over the next decade was virtually the same at 3.8%. This relationship has held true over other long-term historical periods as well (Source: Bloomberg, BlackRock). Treasury yields are expected to remain low. This implies that core bond returns over the next decade are likely to be incredibly low. We believe areas like lower quality bonds may offer greater opportunities, albeit with higher levels of risk.
Three key themes we’re thinking about today
As we mentioned last quarter, we have been incrementally adding risk in the Portfolio as we feel more confident in the stability and longevity of the recovery. But we remain cautious as many risks remain. Three key themes we are thinking about today are:
- What will drive stocks higher or lead them lower from here? Markets have rallied sharply from their virus lows, driven by unprecedented policy support and economies restarting after widespread lockdowns. Elevated valuations in growth stocks increase the risk of higher market volatility, particularly ahead of divisive U.S. elections.
- The virus path and the timing and impact of a vaccine. The activity restart has broadened, with some of the hardest hit sectors showing signs of life. However, it is moving at different speeds between countries, because of differences in dealing with virus dynamics and differences in the main drivers of these economies. The lower mortality rate partly explains the relatively muted market response to a renewed rise in infections. The timeline for a vaccine has surprised to the upside following accelerated efforts worldwide. Yet immunization may not be an immediate cure for the global economy. A recovery to pre-Covid levels will take time.
- Will the market’s confidence in the policy backstop continue? An unprecedented joint monetary and fiscal response has helped support the economy. Agreement on a fiscal stimulus package poses a risk – especially in the U.S. – even as Europe has stepped up its fiscal support. There is much uncertainty as to the timing and scale of additional stimulus which has likely contributed to the recent pick-up in volatility.
Past performance is no guarantee of future results.
Diversification does not ensure a profit or guarantee against loss.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917