BlackRock 2023 outlook sees stocks outperforming fixed-income over 10yrs; calls US recession, flags new economic “regime”

Thu 08 Dec 22, 10:46am (AEST)
A photograph taken at an off-kilter angle shows Wall St, New York, from a pedestrian's point of view
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Key Points

  • BlackRock calls a US recession in its 2023 outlook; says corporate earnings expectations don’t reflect “even a modest recession”
  • Firm painting a picture of a new “regime” defined by a collapse in traditional bond strategies, persistent inflation driven by supply, and aging workforces
  • For as long as a US recession is in place, BlackRock remains attracted to short-term (2Y) government bonds

“We are overweight equities in our strategic views as we estimate the overall return of stocks will be greater than fixed-income assets over the coming decade,” BlackRock writes in its 2023 outlook report released overnight Thursday. 

That might sound like the shiny nugget of insight a lot of traders are probably looking for right now, as international outlooks for 2023 wholemeal continue to become gloomy once more with recession blues.  

On that front, it isn’t all good news. 

“We see recessions looming,” the investment giant added. “Corporate earnings expectations are yet to fully reflect even a modest recession.” 

Necessary evil

That recession, expected to hit in the latter half of the 2023 calendar year, BlackRock says is necessary. It predicts a 2% fall in the US GDP is needed to to hit estimated non-inflationary GDP levels before 2025, which is perhaps not terribly groundbreaking news to anyone who has been paying attention all year. 

Regardless, on Twitter, BlackRock was eager to remind its readers it sees itself turning “more positive on risk assets at some point in 2023 – but we’re not there yet.” 

BlackRock advised readers not to put too much trust into any bull rallies which may occur next year. 

For those playing at home: BlackRock last week said it expects US healthcare stocks to be more likely to weather a recession. 

Source: BlackRock 2023 Outlook Report
Source: BlackRock 2023 Outlook Report

“Regime” change marked foremost by shift in bonds 

Perhaps more interesting to note is BlackRock’s narrative that the world has entered a new “regime,” as far as finance is concerned. 

One of the biggest trends of that “new regime” is a collapse in traditionally held beliefs about bonds, which ultimately proposed bonds would go up when stocks go down. 

That, the firm says, is no longer the case, and so investors out to re-think the classic 60-40 equities-bonds portfolio structure.

That same observation was highlighted by the Wall Street Journal mid-November, which ultimately reported the much-loved portfolio strategy had failed to work in 2022. 

Short-term bonds better for recession, but not after 

All in all, it highlights the likelihood of better returns from an 80-20 equities-bonds portfolios in a chart, though, notes it remains attracted to short-term 

“We don’t see a return to conditions that will sustain a joint bull market in stocks and bonds of the kind we experienced in the prior decade,” BlackRock noted. 

With that said, for the next few years, BlackRock remains attracted to short-term government bonds

Still, zooming out to a decade-long scale between 2022 and 2023, it expects equities to ultimately outperform. For as long as a US recession is in place, however, the firm is "broadly risk-off." 

Source: BlackRock 2023 Outlook Report
Source: BlackRock 2023 Outlook Report

Supply issues causing inflation, not demand 

Another defining trend of BlackRock's "new regime" is persistent inflation constantly underestimated by economists and driven by supply constraints, and not demand. 

Shipping supply chain issues in mid-late 2021 and early-mid 2022 were huge factors in pushing up prices across all sectors; BlackRock notes the pandemic also saw consumers largely swap from services to goods. 

Services, however, are also factors in inflation; the firm actually first called a new supply-led inflationary dynamic all the way back in January, 2022.

Aging workforces add to strife 

Labour shortages, too, are part of this supply story, and under the "new regime," BlackRock flags an aging world workforce population. 

"An ever-increasing share of the US population is aged 65 or older when most leave the workforce.”

BlackRock stated many American workers who stopped participating in the job market when covid hit are unlikely to ever return. 

“This is one key reason the supply of US labor is currently struggling to keep up with demand,” it added. 

BlackRock also leans on the ongoing decarbonisation and net zero energy transition playing out globally to be one of the key elements of its ‘new regime,’ as well as heightened geopolitical risk, and, a structural gap in infrastructure investment. 

Written By

Jonathon Davidson

Finance Writer

Jonathon is a journalism graduate and avid market watcher with exposure to governance, NGO and mining environments. He was most recently hired as an oil and gas specialist for a trade publication.

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