Market expectations of Fed cuts ‘overdone’, volatility to jump in ‘24: BlackRock

NEW YORK: Global markets will be swayed by greater volatility in 2024 as the Federal Reserve cuts benchmark interest rates fewer times than futures markets are pricing in, strategists at the BlackRock Investment Institute said at a panel discussion Tuesday.

Nevertheless, BlackRock, the world’s largest asset manager, continues to see opportunities in equities in AI stocks and technology, particularly in the memory sector, as well as quality factors. The firm has a slight underweight to US equities as a whole, though remains favorable on sectors such as industrials and health care.

“Market pricing for rate cuts is a bit overdone in our view,” said Wei Li, Global Chief Investment Strategist for BlackRock. “Rate volatility is here to stay.”

Markets are currently pricing in a greater than 50% chance that benchmark rates fall more than 125 basis points by next December, according to CME’s FedWatch Tool. Benchmark 10-year Treasury yields have fallen more than 80 basis points over the last month following signs of cooling inflation and weakness in the labor market, bolstering market assumptions that the Federal Reserve is done with its rate hiking cycle.

The shifting assumptions about interest rates will likely lead to a “windshield wiper market” in 2024, in which different sectors fall in and out of favor rapidly, said Tony DeSpirito, Global Chief Investment Officer of Fundamental Equities. He is particularly bullish on memory storage companies, which will play a key role in the growth of AI capability, he said.

“You are buying into memory at the bottom of a cycle that has the potential to be a super cycle,” he said.

Among emerging markets, the firm said that it is bullish on India and Mexico, and has a broad preference for emerging market assets over those in developed markets.

While markets may be expecting too much in the way of Fed cuts, the central bank has likely already hit peak rates, making fixed income more attractive overall, said Kristy Akullian, senior investment strategist at the firm.

The “greatest risk in holding too much cash,” she said.