Markets were exciting in January, as the public battle over a small set of stocks that have been popular targets of short sellers helped fuel a rise in volatility. The S&P 500 Index experienced its worst decline in three months. While this makes for interesting headlines, we think it’s a relatively isolated incident and there are more fundamental issues shaping our views.
Earnings season has been supportive of the recovery narrative, with over 80% of reporting companies beating expectations. Meanwhile, the Federal Reserve used its January meeting to assure investors of their long-term plan for easy monetary policy and low rates, despite rising speculation that their bond purchase program may begin to taper and rates move off the zero bound earlier than expected. Finally, President Biden appears determined to push through a large fiscal package regardless of lackluster support from moderate Republicans.
Our base case of “lower-for-longer” rates and a continued economic recovery aided by easy monetary and fiscal policy remains in place. The pickup in volatility highlights why investors should be measured in adding risk to portfolios, but we still feel the risk/reward of owning stocks and riskier parts of the fixed income markets is justified, albeit less so than last year given the rebound in prices.
While stock valuations certainly aren’t cheap when viewed in a silo, opportunity remains for longer-term investors when comparing equities to lower yielding, conservative bonds. This “risk premium” will likely shape our positioning until a time when high quality bond yields become more attractive and/or our conviction in the recovery wanes. For now, with recent virus data improving, vaccine optimism still justified, and conviction in policy makers, we are comfortable maintaining a moderately pro-risk stance.
In the BlackRock Multi-Asset Income Fund, we are selectively taking profits in areas with lower yields and less upside potential. We are putting cash to work as we see opportunities in dividend stocks, covered calls and areas of higher yielding credit fixed income.