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The Tell: BlackRock warns investors should buy defensive stocks and bonds as tech-led rally at risk of fizzling

Following July’s spectacular rally, U.S. stocks
SPX,
-0.52%

have been caught in a tight trading range over the past two weeks as investors struggle to make sense of some of the most confounding economic data in recent years.

But while the S&P 500 index has held above the key 4,000 level thanks largely to a rebound in badly-hit megacap tech stocks like Meta Platforms META and Amazon.com Inc. AMZN, a team of analysts at BlackRock, the world’s largest asset manager, believes investors would be better served by a less-exciting, defensively positioned portfolio of “low volatility” stocks and bonds.

This view is based on the notion that hopes for a “Fed pivot”, involving the Federal Reserve moving away from its plans to raise interest rates further, are badly misplaced, while signs of corporate performance are deteriorating, and inflation is the services sector is shaping up to be far stickier than investors presently expect.

According to BlackRock’sGargi Chaudhuri, head of iShares investment strategy for the Americas, the asset management giant’s in-house metrics are flashing contradictory signals about the state of the U.S. consumer and the corporate sector.

BlackRock’s in-house model of the U.S. economy is flashing warning signs for corporate performance while the consumer remains robust. Source: BlackRock

But once the market wakes up to the fact that the Fed pivot is still a long way off, stocks could be at risk of reversing some or all of the growth-led rally that has seen the Nasdaq Composite
COMP,
-1.26%

and Russell 1000 Growth Index outperform
RLG,
-0.82%

the Dow Jones Industrial Average
DJIA,
-0.25%

and S&P 500 over the past month. While the surging cost of energy and other goods has garnered most of the attention this year, Chaudhuri fears services inflation like the rising cost of housing will blindside the market by being far stickier than investors and economists presently expect.

Should this pan out, investors would be best to focus their portfolio on”defensive” plays, including high-grade corporate bonds and low-volatility stocks. Defensive portfolios outperformed during the first six months of 2022, even as both stocks and bonds sold off in tandem, resulting in one of the worst first halves for markets in decades.

See: Goldman Sachs says it’s too soon for markets to be trading `a full Fed pivot’

Some ETFs recommended by Chaudhuri include: the iShares MSCI USA Min Vol Factor ETF
USMV,
-0.12%
,
the iShares iBoxx $ Investment Grade Corporate Bond ETF
LQD,
-0.33%
,
the iShares U.S. Healthcare Providers ETF
IHF,
-0.01%

and the iShares 1-5 Year Investment Grade Corporate Bond ETF
IGSB,
-0.19%
.

BlackRock’s worries may already be playing out on Tuesday, as the tech-heavy Nasdaq Composite led markets lower, driven by plunging semiconductor stocks like Nvidia
NVDA,
-4.02%

and Micron Technology Inc.
MU,
-3.77%

The Nasdaq was down 1.4%, while the S&P 500 was down just 0.6% by comparison.

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