Three 2023 Lessons We Carry Into 2024

These volatile moves underscore the first lesson that was reinforced in 2023: The macro backdrop is much more uncertain today than during the Great Moderation period of stable growth and inflation. This is tough to navigate for markets, with them flipflopping between macro narratives through 2023. In the final quarter alone, both stocks and bonds surged on news of lower inflation – with the November PCE report confirming a goods-led slowdown – and dovish Fed projections. Small caps rallied on hopes for a soft economic landing. And markets have repeatedly priced in aggressive rate cuts just to walk them back. All this shows markets may extrapolate a lot from one piece of data or central bank comment. That’s taking a big bet on the macro outlook when the range of outcomes is wide, in our view. We don’t believe the prevalent market narrative tells us new information about where the macro will end up. Yet we are cognizant markets can run with a narrative for some time. This is why we turned tactically neutral on long-term U.S. Treasuries last October. We think long-term yields will resume their rise over time as investors demand more compensation amid persistent inflation and budget deficits.

The greater macro risk means the dispersion of returns has increased. The result: a wide divergence in performance across equity sectors – and greater opportunities for investment expertise to shine, in our view. The correlation between bond and stock returns has flipped firmly into positive territory, meaning stocks and bonds fall or rise simultaneously. As a result, the old approach to portfolio construction that relied on bonds to offset equity sell-offs won’t work, in our view. Instead, we advocate breaking up broad asset allocation blocks and digging deeper. All this is why our second lesson is that granularity is more essential now. We look beyond the macro to seek above-benchmark returns, or alpha, by being dynamic and selective.

One example of going beyond broad asset class exposures is to harness mega forces. The artificial intelligence (AI) mega force drove 2023 stock performance to an even larger extent than we had imagined. The importance of AI and other mega forces hammers home our third lesson: Structural forces matter now. Aging populations mean an ever-rising share of the population is past retirement age, resulting in worker shortages. That’s a key constraint fueling U.S. inflation now as a tight labor market keeps wage growth elevated. Others include the low-carbon transition and geopolitical fragmentation. The latter is evidenced by wars in Ukraine and Gaza and the intensifying structural competition between the U.S. and China.

Bottom line: 2023 emphasized the macro risks but also the opportunities on offer from structural shifts and getting granular in the new regime. Our 2024 Global Outlook outlines how we capture them.

Market backdrop

U.S. stocks surged roughly 25% last year, a near mirror image of their downtrodden 2022 performance. That was partly driven by excitement over AI lifting tech stocks and carrying the broader market. Meanwhile, the 10-year Treasury yield ended the year where it started: It climbed from lows of roughly 3.3% in April, to 16-year highs near 5% in October before falling below 3.9% at year end. We think some of the sharp swings in narratives – and markets – reflect the new regime of greater volatility.

Tracking five mega forces

Mega forces are big, structural changes that affect investing now – and far in the future. As key drivers of the new regime of greater macroeconomic and market volatility, they change the long-term growth and inflation outlook and are poised to create big shifts in profitability across economies and sectors. This creates major opportunities – and risks – for investors. See our web hub for our research and related content on each mega force.

Tracking five mega forces

Mega forces are big, structural changes that affect investing now – and far in the future. As key drivers of the new regime of greater macroeconomic and market volatility, they change the long-term growth and inflation outlook and are poised to create big shifts in profitability across economies and sectors. This creates major opportunities – and risks – for investors. See our web hub for our research and related content on each mega force.

1. Demographic divergence: The world is split between aging advanced economies and younger emerging markets – with different implications.
2. Digital disruption and artificial intelligence (AI): Technologies that are transforming how we live and work.
3. Geopolitical fragmentation and economic competition: Globalization is being rewired as the world splits into competing blocs.
4. Future of finance: A fast-evolving financial architecture is changing how households and companies use cash, borrow, transact and seek returns.
5. Transition to a low-carbon economy: The transition is set to spur a massive capital reallocation as energy systems are rewired.

Granular views

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, January 2024.

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but is creating more space for alpha.

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The BlackRock Investment Institute (BII) leverages the firm’s expertise and generates proprietary research to provide insights on macroeconomics, sustainable investing, geopolitics and portfolio construction to help Blackrock’s portfolio managers and clients navigate financial markets. BII offers strategic and tactical market views, publications and digital tools that are underpinned by proprietary research.

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