BlackRock Downgrades Stocks

BlackRock downgrades stocks but still recommends them for the long term, so it must be recommending short-term timing, which doesn’t work.

Plus, the bond market catches a bid and yields are falling; and PepsiCo, for one, is doing fine in this inflationary environment.

———

BlackRock says that the Fed and other central banks are constrained by government debt. This will prevent them from raising interest rates enough to quash inflation. Instead, they’ll learn to live with it.

One of BlackRock’s arguments is that the Fed will hike its key fed funds rate to a restrictive level by the end of the year. What is a restrictive level?

St. Louis Fed President James Bullard discussed this on Monday in an interview with The Associated Press, from which:

“If you look at the 1980s, which was a boom decade for the US economy, it had very high interest rates compared to today. And if you look at the 1990s, also a boom period for the US economy, it had higher interest rates than today. So it’s not that you can’t grow and prosper in a higher interest rate environment.”

No doubt. In 1981, the fed funds rate exceeded 19%! It didn’t drop below 6% until 1986, and didn’t drop below 5% until 1991. It then spent most of 1995 to 2001 above 5%.

The current fed funds rate is only 1.50% to 1.75%, and the Fed’s own dot plot issued in its June statement indicates that it will raise interest rates to near 3.5% by December and almost 4% in 2023.

Contrary to BlackRock’s claim, bond yields have been falling. According to Bank of America, $7.8 billion flowed into bond funds last week, the largest weekly inflow in two months.

The 10-yr yield is down to about 3% again: 2.96% at yesterday’s close. From the peak on June 14, it has declined 15%.

It’s not all gloomy: PepsiCo previously forecasted 2022 revenue growth of 8%. Now it forecasts 10%. And as if to prove how tricky it is to time the market, its stock didn’t bottom last month or even earlier this year—it bottomed on October 4! It’s up 13% since then.

———

Links to Resources Mentioned

• BlackRock’s July 11, 2022 market commentary

• 1-min video of highlights from St. Louis Fed President James Bullard’s July 11, 2022 interview with The Associated Press

• “The Stock Market from the Roaring ’80s to the Sober ’90s” by David S. Vise in The Washington Post, December 31, 1989

• Treasury yields in 2022

• 10-year breakeven inflation rate

• PepsiCo’s quarterly earnings

———

If you’re not a Kelly Letter subscriber, why not? I’d like to welcome you!

Please subscribe here.