NEW YORK: The U.S. stock market’s two-day tech-led fall last week has revived investor worries about a spiral of selling that could crash the broader market, but Rick Rieder, head of the BlackRock Global Allocation team, does not see stocks going off a cliff.
Indeed, the $23.2 billion BlackRock Global Allocation Fund that Rieder runs currently has options trades that would benefit from a rebound in stocks.
Last week’s pullback in U.S. stocks from record highs came after investors piled into big tech names such as Apple – particularly buying bullish call options. That has caused debate about whether shares are over-extended as investors, buoyed by central bank support, try to look beyond the coronavirus pandemic.
“I think the market is going to keep going higher,” Rieder, said in a Reuters interview. The Global Allocation Fund has been selling calls against existing long positions in large-cap, high-flying tech stocks to benefit from gains if they shake off recent weakness.
Rieder says investors’ concern that stock markets are overpriced is misplaced. While some stocks are grossly over-valued, the generic market is not, he said.
The Global Allocation Fund has a trailing one-year return of 16.99% and outperformed Morningstar’s U.S. Fund World Allocation category by 13.22%, according to Morningstar data.
The most important thing for equities in this market, Rieder said, is not the price-earnings ratio but the Federal Reserve’s bringing the discount rate to zero and its indication that rates will remain there for a long time.
A low discount rate is generally seen as positive for risk because it lowers the threshold to make an investment cash-flow positive. Lowering the risk-free rate – the Fed rate or comparable Treasuries – means that the cost of acquiring capital goes down and makes equities cheaper.
“You’ve created explosive upside for where (the) multiple can go,” Rieder said, referring to any of a number of ratios investors rely on to evaluate stock prices.
The pullback in stocks last week was down to low liquidity conditions and excessive call buying in recent days, which Rieder termed “pretty extraordinary.”
“Some of that is being unwound pretty quickly,” he said.
Rieder also sees an attractive opportunity to use options to take advantage of what he considers expensive election-related volatility. He has been selling volatility past the Nov. 3 U.S. presidential election to subsidize the purchase of calls that will appreciate in value if the market continues to rise from here.
“Volatility during election years is always significantly higher. That being said, the markets are paying a lot for it,” Rieder said.
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