Investors should prepare for a long period of volatility as the US economy climbs out of its 'deep hole,' BlackRock says

• Markets are in for a period of volatility as the economy struggles out of its "deep hole," BlackRock warned.
• Strategists at the world's largest asset manager pointed to structural shifts in the economy stemming from the pandemic.

The US economy is still climbing out of a "deep hole" left by the pandemic – and that means a long period of volatility is ahead for investors, BlackRock strategists said in a note this week.

"Seemingly strong US growth actually reflects an economy that's still climbing out of a deep hole created by the pandemic shock – and tracking a weak growth path," the asset manager warned in its 2024 global outlook.

The firm's prediction would be a start departure from what investors have seen the past decade, when interest rates were ultra-low, growth was steady, and stocks soared as liquidity sloshed through in the market.

But that dynamic has changed on account of two shocks weathered by the economy during the pandemic, BlackRock said.

The first was a hit to the labor market, as pandemic lockdowns put Americans out of work. That means much of the job growth in the last two years has actually been a result of the economy clawing back from those losses.

The second shock was the rapid rise in inflation, as the economy saw a mismatch between what buyers wanted and what suppliers were able to produce. Price increases have since cooled from their highs, but remain well-above the Fed's 2% inflation target, clocking in at 3.2% in October.

Today, the US is still dealing with the fallout from those structural shifts, even if GDP appears to be resilient, the strategists said. Central banks will likely need to keep interest rates higher to prevent a rebound in inflation. Meanwhile, the economy is likely facing a worker shortage as older Americans head into retirement, which could hinder economic growth.

"Our bottom line: This is a regime of slower growth, higher inflation, higher interest rates – and greater volatility," strategists warned.

BlackRock has sounded the alarm for a higher-volatility regime already this year. That volatility already appears to be reflected in stocks, which plunged 20% in 2022 before edging closer to new all-time-highs this year.

But equity investors likely haven't priced in the full extent of damage coming for the economy, strategists warned in a note in October. The firm suggested stocks had more downside as earnings stagnate and economic headwinds continue to bear down on US firms.

"Investors need to take a more active approach to their portfolios. This is not a time to switch on the investing auto pilot," they added in this week's note.

Other forecasters on Wall Street are still warming up to the idea of a soft-landing, bracing for another positive year for stocks. Bank of America, Deutsche Bank, and Société Générale have all predicted the S&P 500 to notch a new all-time-record next year.