Where Wall Street’s Top Minds See Opportunities, And How You Can Profit From It

Where Wall Street’s Top Minds See Opportunities, And How You Can Profit From It
Russell Burns

12 months ago5 mins

  • Some of the top minds at BlackRock, Blackstone, and Goldman Sachs all think a 5% risk-free return on short-dated US Treasuries is attractive in the near term.

  • Morgan Stanley’s US equity strategist has turned bullish on the S&P 500 (at least in the short term) due to an improving technical picture. He’s still concerned about the deteriorating earnings outlook though.

  • Alternative assets may provide uncorrelated returns and could be worth considering if you are bearish on the outlook for both stocks and bonds.

Some of the top minds at BlackRock, Blackstone, and Goldman Sachs all think a 5% risk-free return on short-dated US Treasuries is attractive in the near term.

Morgan Stanley’s US equity strategist has turned bullish on the S&P 500 (at least in the short term) due to an improving technical picture. He’s still concerned about the deteriorating earnings outlook though.

Alternative assets may provide uncorrelated returns and could be worth considering if you are bearish on the outlook for both stocks and bonds.

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If you’ve been struggling to get a read on whether markets are about to go higher or lower, don’t feel bad. Even the top minds along Wall Street can’t seem to agree. Here’s what they’re saying in four of the world’s biggest investment houses – Morgan Stanley, Blackstone, BlackRock, and Goldman Sachs – and the portfolio moves you could make if you think they might be right…

Here's the view from Morgan Stanley

Morgan Stanley’s top US stock strategist Michael Wilson is well-known to be one of the most pessimistic voices around. But he recently did a U-turn that got a lot of people’s attention. He’s now got a positive short-term outlook on the S&P 500, ever since it bounced last week off its 200-day moving average. Mind you, it’s not a complete reversal of outlook for Wilson: he still sees a slew of downbeat earnings revisions up ahead for companies.

What's the opportunity?

Markets are difficult to forecast correctly at the best of times, but when the technical indicators and the economic fundamentals give you opposite signals – with one telling you to buy and the other telling you to sell – it becomes even trickier. I prefer to follow the technical indicators at times like these. They tend to limit your losses and prevent a stubborn fundamental view from getting in the way of what the market is “saying”.

And right now, those technicals suggest the stock market is pretty comfortable with the current levels of interest rates. If you agree, you could consider buying the SPDR S&P 500 ETF (ticker: SPY; expense ratio: 0.1%).

Here's the view from Blackstone

Joe Zidle, Blackstone’s chief investment strategist, wrote in his February letter that inflation is on its way down, but said it’s not going to smoothly glide back to comfortable levels. Now, Blackstone owns 250 portfolio companies that collectively employ some 700,000 people, and this gives the firm a unique insight into the labor market and its wage pressures. In its most recent survey of a representative sample of these companies, respondents said they expect percentage wage increases in the mid-single digits in 2023, compared to the pre-Covid low-single-digit increases. The surveyed CEOs said that although job vacancies remain high, they expect a slowing economy to ease the salary-raising competition for new hires.

But for now, Blackstone’s top investment strategist says wage pressures will likely lead the Federal Reserve (the Fed) to keep interest rates higher for longer, in hopes of cooling the inflation that those bigger paychecks help to create. So adding duration – that is, assets more sensitive to high interest rates – to your portfolio may not be the wisest course of action right now.

What's the opportunity?

Cash is king – well, maybe not king, but cash and cash-like products do look awfully grand with interest rates expected to remain higher for longer. In the US, risk-free cash returns on short-term US Treasuries are above 5%. Similarly in the UK, you can buy a one-year fixed-rate bond from the government-insured National Savings & Investments (NS&I) yielding 3.97%.

Here's the view from BlackRock

Rick Rieder, BlackRock Global Fixed Income’s chief investment officer, is much more optimistic about assets in 2023 than he was in 2022. He says a 5% return on cash looks attractive, but European stocks look even better. Now, he’s not suggesting you go all-in on European shares, (or any other asset, for that matter), but he says their valuations and technicals look a whole lot better than the ones you find stateside. He also sees good stock opportunities in Japan and China. For the US economy, he sees growth slowing this year and setting the stage for interest rate cuts next year. And he doesn’t see an infusion of massive government spending, given the country’s growing debt burden, already high interest costs, and divided Congress. As for that “pandemic” recovery rebound trade that’s helped the US, Europe, and China, he says that’ll have faded next year. He sees the 10-year yield on US Treasury hitting 2.5% next year, down from the current 3.97%.

What's the opportunity?

Rieder’s outlook is pretty rosy for risk assets. To bet on European equities, you could consider buying the iShares MSCI Eurozone ETF (EZU; 0.52%). To wager on an improvement in China’s shares, you could think about the iShares MSCI China ETF (MCHI; 0.58%). If you want to invest in Japan, you’ll want to pick and choose your stocks, rather than opting for a country ETF. Japanese banks still look cheap and are likely to benefit from higher interest rates, but the country’s multinational exporters probably won’t do as well. Higher rates would likely strengthen the yen, and shrink the value of the sales these companies make overseas.

Now, if Rieder’s right and the yield on the 10-year US Treasury really does drop to 2.5% next year, that implies a sharp slowdown in the world’s biggest economy, one that would probably drag down inflation pressures too. All stocks may not perform that well in that scenario, but lower interest rates could be good for tech and longer-duration growth stocks. In that case, you could consider buying the ARK Innovation ETF (ARKK; 0.75%), or the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 0.14%), which would benefit from the sharp move lower in yields.

Here's the view from Goldman

Goldman’s multi-asset strategist, Christian Mueller-Glissmann, is keeping a conservative outlook, as he is concerned about both inflation and interest rates moving even higher. So, he’s leaning hard into cash – and not bonds. He thinks the traditional 60/40 portfolio (with 60% allocated to stocks and 40% to bonds) may face a scenario like last year, when both stocks and bonds fell. He recommends investing in real assets and alternatives – for example, trend-following strategies and safe-haven currencies (which might once again include the yen).

In Europe, he likes value stocks more than growth ones, mostly because they tend to perform better when interest rates move higher. He also sees limited upside in US stocks with their already rich valuations, with interest rates likely to move higher.

What's the opportunity?

If you agree and are cautious about the outlook, alternative assets could provide uncorrelated – that is, different – returns to stocks and bonds. To gain exposure to the yen, for example, you could consider investing in the Invesco CurrencyShares Japan ETF (FXY; 0.4%). Or for exposure to trend-following strategies, you could consider the iMGP DBi Managed Futures Strategy ETF (DBMF; 0.85%).

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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