BlackRock’s Rick Rieder on assets to buy now as the Fed raises rates

  • BlackRock’s Rick Rieder says the economy can handle three more rate hikes before it needs a break.
  • He recommends investing cash in short-term Treasury bills and high-quality credit assets.
  • As for long-term or 20-year horizons, he would buy stocks, especially in the growth sector.

While inflation is still strong, the US central bank continues to raise interest rates. The fed funds rate is now in a range of 3% to 3.25%, leaving room to catch up to the Fed’s updated year-end projection of 4.25% to 4.5%.

In an interview with Insider’s Block Street, BlackRock’s chief investment officer for global fixed income, Rick Rieder, said there was a risk the Federal Reserve might go too far with tightening.

He estimates that the economy can sustain three more rate hikes: one of 75 basis points, followed by 50 basis points, and perhaps another 25 basis points. But at some point, the Fed needs to step back and allow the economy to catch up, he noted.

There is a lag and it’s not linear, he added. It could take three to nine months for the global economy to see the manifestation of rate hikes. Towards the start of the year, we will certainly start to see the effects ripple through the system, starting with interest rate-sensitive sectors of the economy such as the housing market, he noted. .

When asked what actions the central bank might take as a signal to slow its tightening, Rieder acknowledged that we won’t see a 2% inflation rate for some time. Therefore, it is on the dynamics and expectations around inflation that they focus.

Other factors they are monitoring include a reduction in salaries and job offers, he said. For example, they are willing to let the unemployment rate rise to achieve their goal, he added.

“Quite frankly, I thought the biggest thing about the recent statement from the Fed was that it pushed the unemployment rate up from 3.7% to 4.4% in 2023 and 2024,” Rieder said. “It’s a big change from where they were at the June and March meetings when they released their projections.”

However, he refrained from saying that the US economy would end up in a deep recession. Periods when the economy really slows are almost always driven by excess leverage in the system, which is not the case this time around, he said. Instead, the economy can tangle with slower industrial production.

There could be a scenario where the rest of the world is going through turbulence, such as a gas shortage in Europe or a continued slowdown in China’s economic growth and that could have a more negative impact on the US economy, he said. -he adds.

Given the global economic risks, fixed income securities are a great place to park your money and wait, he noted. For example, the two-year Treasury yield, although fluctuating, is now around 4.25%, he noted, while high-quality short-term credit assets are yielding 5% or more. If you can get a 5% return from fixed income with virtually no risk, compared to the historic 8% to 10% from equities, that’s a headwind for the volatile stock market, he noted.

“I need a bit more than that to withstand the volatility. Especially considering that I think the earnings projections are too high for next year and the multiple hasn’t really been re-evaluated” , Rieder said.

He would still hold stocks that he does not expect to touch in the next 20 years. And if you’re funding a long-term pension or allocating to a 401(K), he’ll absolutely buy stocks. In particular, he likes to own growth stocks, companies that are expected to multiply their return on equity. He named sectors such as technology, biotechnology and healthcare as fantastic revenue generators. These stocks are being repriced as investors fear the economy will never recover, he added.

“It’s times like this that you’re like, ‘Okay, if I can just expand my horizon a little bit further, I’m usually doing fine’. In fact, I always find that you don’t generate a lot of yield until you have a hole in my stomach,” Rieder said. “I don’t really like that pit in my stomach, and I know that when I have that pit in my stomach , more likely than not, my returns will be really good because no one wants to take the risk at those times. .”

One adjustment he would make would be to flip the traditional 60/40 stock-to-bond ratio to 40/60 and use some of his money to buy one- to two-year fixed-income assets until things are stabilizing.

“In my mind, one of two things needs to happen: either credit markets and the risk-free rate need to stabilize, or I think equities need to revalue a little cheaper. I guess both will produce,” Rieder said.