Enhance your investment strategy with market insights from BlackRock

Whatever the clients of Wall Street’s top investment houses are doing, retail investors can catch a glimpse and try to follow as long as the reasoning makes sense. This week, investors take a look inside BlackRock Inc. NYSE: BLACK and what this company recommends its customers do.

As stocks recover to flirt with their all-time high price, set at the end of 2021, inflow and outflow activity within the $117 billion behemoth could give Main Street the answer it’s been looking for. A key trend to keep in mind is the potential interest rate cuts proposed by the Federal Reserve (Fed) and how this possibility impacts investors today.

Inside BlackRock, clients continue to bet on rising stocks and see no reason to move into fixed income assets (bonds). This behavior is typical of low interest rate environments, as bond yields fall alongside Fed rates and consequently help stocks across sectors rise.

It’s all a matter of certainty

The Fed began the year by announcing it would cut rates by March 2024, but U.S. inflation data proved stickier than expected in March. The Fed’s mandate focuses on two major economic factors: inflation and unemployment.

As long as the job market remains hot, considered below 4% for national unemployment, the Fed won’t have much incentive to start cutting interest rates. When investors notice unemployment numbers hitting the 4%-5% mark, they might reasonably expect some interest rate action.

On the inflation front, March data showed an inflation rate of 3.5%, spooking markets after February’s 3.2%. Official Fed data still shows an inflation rate higher than the set target of 2%, so rate cuts (in terms of employment and inflation) are far from the markets’ sight today.

Traders have lost hope in any possibility of a rate cut in May or June 2024, as the FedWatch tool CME Group Inc. it now shows traders’ prices for these cuts for September 2024 instead. Why do BlackRock clients continue to bet on stocks, not bonds, amid all this uncertainty?

Insider table behavior

Institutions like BlackRock generally know what is really happening, far from having a negative or illicit connotation. BlackRock’s access to global data and the thousands of analysts who work every day to derive insights simply provide the competitive advantage its clients need to see far enough into the future.

Because of this, equity clients gave BlackRock its most significant inflow for the first quarter of 2024; the retail equity segment saw a net asset inflow of $4.9 billion. At the same time, fixed income retail clients withdrew a net $25 million from this portfolio.

At the institutional level, Exchange Traded Funds (ETFs) followed a similar path, as equity ETFs saw a net inflow of $128 billion, while fixed income ETFs only saw $96.6 billion.

A final check concerns the active management customer segment. These clients rely on BlackRock’s active management during uncertain times characterized by unstable fundamental trends and a high volatility index (VIX). The VIX remains below its 252-day average by 19%, but active management has not been used much.

This is why the equity and fixed income active management segments saw outflows of $6.3 billion and $5.6 billion, respectively.

Goldman Sachs: a sounding board

With The Goldman Sachs Group Inc. NYSE:GS which will release its quarterly earnings this week, whatever it recommends to its clients could also be based on BlackRock’s trend.

As the investment bank looks to hit a new all-time high, markets are getting more specific about this interest rate cut thesis. Low interest rates spur investment banking activity, as low-cost financing spurs mergers and acquisitions (M&A) deals that incur the majority of bank fees.

Over the past nine months, the SPDR fund for selected financial sectors NYSEARCA: XLF it outperformed the broader S&P 500 index by about 5%. Typically, financial stocks are the first to react to changes in interest rates, as these rates drive interest income and other fee-based activities.

This price action suggests that all is well with the rate cut narrative, even if it has been postponed.

Retail investors have one thing to learn: Goldman’s price action and BlackRock’s asset rotations are linked. Certainty remains high for these Wall Street giants, and clients see more certainty (and potentially upside) in equities than fixed income, meaning “higher for a longer period” rates may not be a reality.

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