The S&P 500 (^GSPC) is surfing yet another all-time high, currently up over 70% from the worst depths of the coronavirus crash a year ago and around 17% up from the before times.
Covid isn’t over, and people aren’t all back to work, but BlackRock, the biggest money manager in the world, is bullish on stocks, even in the face of inflation concerns.
In a note Monday, the firm said that it was overweight U.S. equities and has a current view of an economy and market that’s beyond a “recovery.”
“We see the path out of the Covid-19 shock as a ‘restart’ – not a typical business cycle ‘recovery,’” a BlackRock note to clients said Monday. This is “a distinction that matters for markets.”
This outlook is leading BlackRock to push further into cyclical assets and “bolster our pro-risk stance over the next six to 12 months,” the firm said.
This extends beyond the big large-cap names and S&P 500. In fact, BlackRock said it has a preference for small caps that “extends to private equity and private credit,” and also is overweight emerging market stocks, even noting that the recent selloff in emerging markets serves as an opportunity for entry.
Not a recovery
Three reasons cement this analysis, which isn’t necessarily consensus among the big institutions in the financial world. (Bank of America, for example, wrote Monday that it wasn’t sure S&P 500 returns would shine this year due to inflation concerns.)
The current scenario has little in common with a typical recession and far more in common with a natural disaster in which economic activity stops and starts.
“Activity quickly rebounded in the second half as restrictions eased — and is now poised to leap forward as vaccines are rolled out,” BlackRock said. “The restart is about turning things back on, not about the rebuilding of confidence that is needed in a typical recovery.”
As a result, this may make the “restart” happen far faster than a typical business cycle recovery.
“We believe much activity will restart on its own, and won’t need policy stimulus as much as in typical recessions,” the firm said. BlackRock expects real GDP to return to pre-Covid levels by the middle of the year and growth trends to return to pre-Covid levels in a few years.
The next reason is even more potent: pent-up demand. BlackRock notes that the economic shutdowns last year affected all income groups – people just haven't been able to spend on certain things (particularly services), thus making way for "broad-based pent-up demand." Plus, stimulus payments for millions of Americans means the personal finance outlook is rosier now than it was at the end of the Financial Crisis.
“We estimate excess household savings in the U.S. to be about $1.8 trillion larger than in the year before the pandemic, with lower-income households supported by fiscal stimulus,” BlackRock said.
The elephant in the room
When the economy and markets heat up, the worry, of course, is inflation. If things get too hot, the Fed might step in to keep inflation in check, which could put downward pressure on equities. But BlackRock’s bullish stance has an answer for that too: “Inflation dynamics look very different today.”
“A typical recession is caused by a fall in demand,” BlackRock said. “Demand catches up only slowly to supply in a normal recovery, leading to disinflationary pressure. This is less the case today, as the Covid shock was caused by a fall in both demand and supply. Both have to catch up, in our view.”
The strong government response to the Coronavirus Crisis has been around four times what it did during the Financial Crisis of 2009 and the losses were only a quarter, bullish for demand.
On the supply side, BlackRock notes companies have followed a “typical recession playbook” and cut costs and capacity as a response to the drop in demand. With stimulus abounding and lower levels of supplies than usual, this might be a recipe for higher prices if productions can’t spin up quickly.
But even in the face of inflation, the “Federal Reserve has signaled it will be less responsive to rising inflation than in the past” — the third reason BlackRock sees the current situation as a powerful restart rather than a recovery.
With respect to this restart, BlackRock contends, “[we] believe markets still under-appreciate its size and speed.”
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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.