You Can Follow BlackRock’s Market View for Your Money

Whatever clients at Wall Street’s most prominent investment houses are doing, retail investors can get a glimpse and attempt to follow behind them as long as the reasoning makes sense. This week, investors get an inside look into BlackRock Inc. (NYSE: BLK) and what this firm is advising its clients to do.

As the stock rallies to flirt with its all-time high price, set in late 2021, inflow and outflow activity inside the $117 billion behemoth could give Main Street the answer it has been looking for. One key trend to keep in mind is the potential interest rate cuts proposed by the Federal Reserve (the Fed) and how this possibility affects investors today.

Inside BlackRock, clients keep betting on increasing equities and see no reason to rotate into fixed-income assets (bonds). This behavior is typical of low-interest rate environments, as bond yields fall along with the Fed rates and subsequently help stocks of all sectors push higher.

It is All About Certainty

The Fed started the year by saying it would cut rates by March 2024, but U.S. inflation data proved stickier than expected when March came. The Fed’s mandate focuses on two main economic factors: inflation and unemployment.

So long as the labor market stays hot, considered below 4% for national unemployment, the Fed won’t have much incentive to start cutting interest rates. When investors notice unemployment figures reach the 4% to 5% mark, they could reasonably expect some action regarding interest rates.

On the inflation front, March data showed a 3.5% inflation rate, scaring markets after February’s 3.2% reading. Official Fed readings still show a higher inflation rate than their set 2% target, so rate cuts (on employment and inflation terms) are far out of sight for markets today.

Traders lost hope in any chance of a rate cut in May or June 2024, as the FedWatch tool at CME Group Inc. now shows traders pricing in these cuts for September 2024 instead. Why do BlackRock’s clients keep betting on stocks, not bonds, amid all this uncertainty?

Insider’s Table Behavior

Institutions like BlackRock typically know what is really happening, far from having a negative or illicit connotation. BlackRock’s access to global data and thousands of analysts working every day to derive insights simply give it the competitive advantage its clients need to see far enough into the future.

For this reason, equity clients gave BlackRock the most significant inflow for the first quarter of 2024; the retail equity segment saw a net $4.9 billion inflow of assets. At the same time, retail fixed-income clients took out a net $25 million from this portfolio.

Institutionally, exchange-traded funds (ETFs) followed a similar path, as equity ETFs reported a net inflow of $128 billion, while fixed-income ETFs were only $96.6 billion.

One last check comes in the active management client segment. These clients rely on BlackRock’s active management during uncertain times, characterized by shaky fundamental trends and a high volatility index (VIX). The VIX remains below its 252-day average of 19%, but active management wasn’t used much.

This is why equity and fixed-income active management segments saw a respective outflow of $6.3 billion and $5.6 billion.

Goldman Sachs: A Sounding Board

With The Goldman Sachs Group Inc. (NYSE: GS) set to report its quarterly earnings this week, whatever its clients are advised to do could also build upon BlackRock’s trend.

As the investment bank looks to make a new all-time high price, markets are more specific about this interest rate cut thesis. Low interest rates spark investment banking activity, as cheap financing stimulates mergers and acquisitions (M&A) deals that bring in the bulk of the banks' fees.

Over the past nine months, the Financial Select Sector SPDR Fund (NYSEARCA: XLF) outperformed the broader S&P 500 by roughly 5%. Typically, financial stocks are the first to react to interest rate pivots, as these rates drive interest income and other fee-based businesses.

This price action suggests that all is well with the rate cut narrative, even if it is being postponed.

Retail investors have one thing to take away: Goldman’s price action and BlackRock’s asset rotations are linked. Certainty remains high for these Wall Street giants, and clients see more certainty (and potentially upside) in equities rather than fixed income, meaning ‘higher for longer’ rates may not be a reality after all.

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Breakout Alert: Coinbase's Consolidation Is About To End

There's no denying that equities are a strong market right now. The benchmark S&P 500 index has been powering to high after high since before Christmas, and there are increasing signs of the Fed beating inflation. 

With such a risk-on sentiment sweeping markets, many stocks that did so before the 2022 crash are back in vogue. One such stock in particular is Coinbase Global, Inc. (NASDAQ: COIN), the digital cryptocurrency exchange. Its shares have been recovering for over a year now, but even with a 700% rally, they're still nowhere near the highs of its 2021 IPO. 

Links with Bitcoin

That's just to give some context on how hard some of these growth-focused tech stocks were hit and how much potential some of them still hold. Coinbase investors and many analysts covering the stock are looking for further upside from here. 

Much of Coinbase's upside, past, present or future, is tied to Bitcoin's performance. As the largest and most well-known cryptocurrency, it can safely be said that Coinbase catches a cold anytime Bitcoin sneezes. 

The same is true of the opposite, though, and it's no coincidence that Coinbase's eye-watering recovery rally broadly mirrored that of the biggest cryptocurrency. Bitcoin is consolidating with some healthy sideways action after logging more than 350% gains since 2022. 60% of those have come this year alone, and technically speaking, it looks like Bitcoin is on the verge of breaking out to the upside once again. 

Reasons to be Optimistic

Assuming this happens, investors should expect Coinbase to follow suit. It, too, has traded in a tight range since the start of March, and the daily range is indeed narrowing. It's also building up a pattern of higher highs against a strong layer of resistance around the $270 mark. This is like shaking a can of soda; eventually, it's going to pop. 

Last week, the Oppenheimer team reiterated its Outperform rating and boosted its price target to $276. This is now a street-high target and bodes well for Coinbase's performance in the near term. The analysts are concerned that Coinbase might be overly exposed to Bitcoin's performance and already overextended its profitability. And with a price-to-earnings (PE) ratio of 700, it's hard to disagree with them. 

Piper Sandler, for example, reiterated its Neutral rating on Coinbase shares this week, while the teams at Barclays and Bank of America both gave the stock a bearish Underweight rating. There's no doubt that, like crypto in general, it's a divisive topic among analysts and investors alike. 

Getting Involved

But the proof is in the pudding, or in this case, the stock's performance, and there’s no getting away from the fact that Coinbase shares have been defying gravity and these bearish analysts alike. If Bitcoin can break out of its current phase of consolidation and head for bluesky territory near or beyond $80,000, there’s every reason to think Coinbase will find itself trending north with it.

It will take a certain kind of investor with a particular appetite for risk to get involved in a stock that does hold some Sell ratings from heavyweights on Wall Street. However, the fact that Coinbase has been somewhat muted in recent weeks has done it no harm at all, as this has allowed the stock’s relative strength index (RSI) to pull back from the extremely overbought readings in the high 80s to a much more appealing 55. Considering that the past few weeks might just be the last few quiet ones that Coinbase shares will have for some time. 

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3 Key Stocks Helping to Drive the EV Race

Of the few significant trends driving investor—and Wall Street—interest today is the race for electric vehicle (E.V.) domination. Like technology stocks in their own race for artificial intelligence (AI) breakthroughs, investors need to be extra picky about which names to back and why.

While it can be a wild guess as to which company could win the race, one trend is as clear as shooting fish in a barrel. Whether it is Tesla Inc. (NASDAQ: TSLA) or BYD Company Ltd. (OTCMKTS: BYDDF) that takes over most of the EV market share, both would need the help of two critical components to rise to the top.

Copper and lithium are fundamental materials in making batteries to make these EVs work, where two mining stocks come into play as indispensable. BHP Group Ltd. (NYSE: BHP) and Sociedad Quimica y Minera de Chile (NYSE: SQM) may be the crutches that Wall Street and investors call upon to really ride the EV wave to its completion.

A Hiccup in the Road

Price action hasn’t favored any of these stocks; as a group, they trade at an average of 70% of their 52-week high prices. Wall Street’s bear market definition is a 20% or more retracement from recent (or all-time) highs, opening the foundational pillar for investors to consider a cyclical value play in the space.

Between 2021 and late 2022, lithium prices rose to a decade-high. At the same time, copper reached levels not seen since 2011. This was the result of a demand boom fueled by easier monetary policy in the United States. Markets were spooked right after and decided to ditch these potentially overpriced stocks.

After markets returned to their senses, these companies declined by more than 50% on average, reflecting the doubtful nature of the EV’s potential future. However, history may repeat itself now that U.S. consumer sentiment is at a 2021 high, and the Federal Reserve (the Fed) is proposing up to 3 interest rate cuts in 2024.

Cheaper financing rates could help revive demand for EVs this year, as is the needed case after Tesla reported delivery demand below expectations. The stock is now trading at a dismal 58% of its 52-week high, and analysts at The Goldman Sachs Group Inc. had no shame in slashing their price targets from $190 a share down to $175.

At the same time, lower EV demand dropped copper and lithium prices to cyclical lows. This effect can be seen in Sociedad Quimica’s decline to 2021 levels, and BHP Group’s current $50 a share price target calls for up to 16% downside in the stock.

The Bottom Starts with Suppliers

Analysts may soon need to update their earnings per share (EPS) projections for BHP Group. Management currently expects an EPS decline of 11% for the next 12 months and believes these predictions are far from the truth.

Paying investors an annual 4.8% dividend is not easy, as these payouts need to be financed through free cash flow (operating cash flow minus capital expenditures), and without predictable—and reliable—profits, there is no free cash flow.

BHP’s copper is far from the spotlight in the EV sphere, but it is still a key component to watch. Because the stock is part of low beta stocks, investors could rely on minimal price action and a steady dividend to get them through the winter.

However, lithium presents a more mainstream bet for those looking to grow their wealth at a potentially quicker rate. Sociedad Quimica’s high beta could help its stock price reach the consensus price target of $66 a share set today by analysts.

With projected EPS growth of 37.6% this year, the company is set to beat the mining industry’s expected 8.6% growth. The stock’s 7.3x P/E valuation falls below the specialty chemicals industry’s 308x P/E, a massive discount despite being set to grow at above-average rates.

The Tale of Two Cities: Tesla and BYD

BYD’s underdog narrative has helped it stay under the radar while quietly surpassing Tesla in global EV sales. Because this company has reached a more diversified customer base (in terms of geography), it can cushion the inevitable swings in consumer trends and sentiment that may hit EV sales trends.

No matter BYD’s reach, one thing stays true: It is a Chinese stock. Chinese stocks have suffered from the worst of reps in the past few years, with blue-chip names like Alibaba Group struggling to break out and regain investor confidence. Because of that, Tesla’s dip may look a lot more attractive to investors.

While BHP and Sociedad Quimica’s position in the EV race is undeniable, the third component – the potential winner – will require investor scrutiny in considering Tesla versus BYD.

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