$7.4 trillion investment giant BlackRock's top strategist says US stocks face a reckoning ahead of a 'tumultuous' presidential election

FILE PHOTO: A sign for BlackRock Inc hangs above their building in New YorkReuters
  • BlackRock said US stocks will be sensitive to the upcoming presidential election in November and as the impact of fiscal and monetary policy stimulus measures disappear.
  • In a 2020 mid-year outlook, BlackRock said the US election will take place against the most "tumultuous domestic backdrop since 1968," and the result will be "consequential for markets."
  • BlackRock is however overweight on corporate credit and European equities.
  • BlackRock's chief strategist Mike Pyle told CNBC he is "cautious on US equities" because of uncertainty on the back of a "pretty volatile election season."

BlackRock's top strategist fears for US stocks once the impact of fiscal stimulus dissipates and the closer the market inches towards the impending US election in November.

In a 2020 midyear outlook BlackRock said: "The world is increasingly becoming bifurcated, with the US and China at opposite poles. Intense rivalry looks set to affect nearly every dimension of the US-China relationship — regardless of the US election outcome."

"The US presidential election set to take place against the most tumultuous domestic backdrop since 1968. The two parties are as far apart on policy as they have ever been, making the result consequential for markets," BlackRock added.Advertisement

Trump v Biden is a major risk to stocks

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Speaking to CNBC after the report's publication, Mike Pyle, global chief investment strategist at BlackRock, said: "I would say we are cautious on the US market overall because of the fiscal story, and the remaining challenges around the public health response and what we think is a pretty volatile election season with policy uncertainty on the back of that."

The $7.4 trillion asset manager said it is underweight on emerging markets, overweight on European stocks and "cautious" on US equities.

BlackRock said in its mid-year outlook: "On a tactical horizon, we are modestly pro-risk, with an overweight in corporate credit. We prefer up-in-quality assets with strong policy backstops."

"We cut US equities to neutral after a stretch of outperformance as we see risks of fading fiscal stimulus and election uncertainty." Pyle told CNBC: "We entered the year overweight equities and credit. At the very end of February, as the storms gathering around the coronavirus became apparent, we cut those investments back to neutral weight."Advertisement

"The strong policy backstop was going to mean credit assets are going to have a smoother and more resilient ride ... versus equity assets," he added.

Risks of the benefits of fiscal and monetary policy disappearing

Pyle said a strong US fiscal and monetary policy response is the reason why markets have recovered, but he questioned how sustainable this is.

Markets have recovered since touching lows in March at the crux of the coronavirus crisis. The S&P 500 has gained about 35% since touching a low of 2237.40. Advertisement

Read More: A market-crash expert known as 'Dr. Doom' warns a 10-year depression is coming — and says investors are far too confident about a possible recovery

Pyle said: "With $2 trillion plus of support fiscally as well as a monetary policy response from the Fed, as we look ahead, our concern is the US runs a risk in the back half of the year of retrenching too quickly on fiscal policy."

Some of the Fed's recent monetary measures include $2.3 trillion in lending to support households, employers, financial markets and state and local governments, and reducing interest rates to almost zero.Advertisement

The Federal Reserve spent $428 million buying debt in individual companies in the first wave of its corporate bond-buying programme, data released Sunday showed.

The program, which is known as the Secondary Market Corporate Credit Facility, will take in up to $250 billion in corporate bonds from eligible issuers.

Pyle's comments about what might happen to market once the Fed stops shoring up the economy so aggressively echo those made by billionaire investor Howard Marks last week.Advertisement

Marks said: "If they get the market to a level where it wouldn't be but for their buying, then does that mean that markets are dependent on the Fed buying forever. What happens if they stop and will they stop doing it forever."

Pyle is more optimistic on European stocks

Although concerned by what might happen to US stocks, Pyle is more bullish on the trajectory of European stocks. Read More: The stock market's fear gauge is sending a persistent warning that has a 30-year track record of signaling meltdowns aheadAdvertisement

"We think that gives a lot of tail winds for Europe to outperform for the second half of the year, relative to broad emerging markets," he said. "While risks remain, it's a much more robust policy framework than we thought two or three months ago."

The company added in its mid-year outlook: "We upgrade European equities to overweight. The region is exposed to a cyclical upside as the economy restarts, against a backdrop of solid public health measures and a galvanizing policy response. "