BlackRock says it's shunning stocks because of economic pain ahead from central bank tightening

Published Tue, Sep 27 202212:13 PM EDTUpdated Tue, Sep 27 20223:35 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The pain for stocks is far from over and investors should look elsewhere until the market comes to grip with a global recession caused by central banks, according to the BlackRock. The strategists at BlackRock Investment Institute, led by Jean Boivin, said in a note to clients on Monday that they are underweight developed market stocks and that investors are still too optimistic about a potential "soft landing." "Many central banks aren't acknowledging the extent of recession needed to rapidly reduce inflation," wrote Boivin and his team. "Markets haven't priced that so we shun most stocks." Bonds and stocks have both fallen sharply this year as the Federal Reserve and other central banks have hiked interest rates. On Monday, the S & P 500 fell to a new bear market low, its lowest level since late 2020, and the 10-year U.S. Treasury yield jumped to its highest level since 2010. Bond yields move opposite price. "Many central banks, like the Fed, are still solely focused on pressure to quickly get core inflation back to 2% without fully acknowledging how much economic pain it will take in a world shaped by production constraints. ... This all implies a clear sequence: overtighten policy first, significant economic damage second and then signs of inflation easing only many months later. We're tactically underweight developed market (DM) stocks and prefer credit," the note said. BlackRock defines its "tactical" timelines as the next six to 12 months. "We prefer investment grade credit as yields better compensate for default risk. Plus, high quality credit can weather a recession better than stocks," the note added. High quality credit is issued by companies that are less likely to go bankrupt than those that are riskier and issue so-called junk bonds. For investors, that means they can be reasonably confident that the debt will eventually be repaid, making short-term declines in market price easier to swallow. BlackRock is bullish on one area of stocks: companies that are leading the transition to clean energy. The note said there are "tactical opportunities" in some energy companies and that investors can find exposure in companies that have believable transition plans or are key parts of the clean energy supply chain, rather than only pure-play green energy stocks.