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July 25, 2019, 9:25 a.m. EDT

Unless you’re convinced the economy is about to tank, trim these stocks, says world’s biggest asset manager

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By Shawn Langlois, MarketWatch

A technician monitors electricity levels.

A good defense apparently isn’t the best offense in this market.

That seems to be the takeaway from the latest blog post from BlackRock /zigman2/quotes/207946232/composite BLK -1.53%  , which oversees more than $6.5 trillion in assets.

Russ Koesterich, portfolio manager for BlackRock’s Global Allocation Fund, was talking about how classic “defensive” stocks, like utilities, are getting pricey.

“When your teen starts to drive, you pay a higher insurance premium to guard against heightened risk,” he wrote. “In a slow growth, ‘tweet prone’ world, investors should expect to pay a premium for the safety of less cyclical names.”

But, Koesterich says, that premium is getting too high, with utilities up 5% since mid-April, having ridden a dip in U.S. 10-year Treasury yields /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -5.15% to two-year lows.

“As defensive stocks tend to be more sensitive to interest rates,” he said, “they have rallied as interest rates have plunged.”

He used this chart to show how valuations look extended relative to the S&P.

Utilities are trading at a 4% premium relative to the broader U.S. market while consumer staples are at a 7% premium — both above the post-crisis average.

In terms of absolute valuations, he says the S&P 500 Utility Sector /zigman2/quotes/210600278/delayed XX:SP500.55 +0.80% is currently trading at nearly 20.5x trailing earnings, a post-crisis high, while staples are even more expensive at 21x trailing earnings.

“Should trade frictions escalate or some other exogenous shock knock the U.S. into a recession, both utilities and staples would likely outperform,” Koesterich said. “While defensive stocks play a role in a portfolio, absent the economy falling off a cliff, a little trimming may be in order.”

Separately, BlackRock founder Larry Fink said last week that “people are under-invested in equities” and that they shouldn’t hesitate to go long equities even as the market trades in record territory.

Fink noted in an interview on CNBC on Friday that there was a “change of tone of central bank behavior, and you’re starting to see corporate earnings coming in pretty well,” and this provides an underpinning for recent gains, with a forecast that markets will continue to rally.

“At these levels, markets are going to trend higher,” he said.

The Dow Jones /zigman2/quotes/210598065/realtime DJIA -0.07% is, indeed, trending higher Thursday, though both the S&P /zigman2/quotes/210599714/realtime SPX +0.48% and Nasdaq /zigman2/quotes/210598365/realtime COMP +1.29% are weaker.

$ 528.64
-8.20 -1.53%
Volume: 1.16M
May 29, 2020 4:00p
P/E Ratio
Dividend Yield
Market Cap
$81.55 billion
Rev. per Employee
add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
-0.04 -5.15%
Volume: 0.00
May 29, 2020 5:00p
add Add to watchlist XX:SP500.55
+2.39 +0.80%
Volume: 117.73M
May 29, 2020 5:14p
US : Dow Jones Global
-17.53 -0.07%
Volume: 545.14M
May 29, 2020 5:14p
+14.58 +0.48%
Volume: 4.38B
May 29, 2020 5:14p
US : U.S.: Nasdaq
+120.88 +1.29%
Volume: 4.24M
May 29, 2020 5:16p

Shawn Langlois is an editor and writer for MarketWatch in Los Angeles. Follow him on Twitter @slangwise.

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