NEW YORK: Investors brace for a tougher race for markets as concerns over slowing growth, an imminent pullback to easy Federal Reserve monetary policies and a global Covid-19 resurgence threaten a rally that has saw the S&P 500 double from last year’s low.
Signs of caution abound, even as US stocks approach record highs. Goldman Sachs economists recently lowered their estimate for tracking U.S. economic growth in the third quarter to 5.5% from 9%, due to the impact of the Delta variant, while fund managers polled by BofA Global Research said they raised the cash overweight positions to the highest level since October 2020, while strengthening positions in defensive sectors such as healthcare and utilities.
Concerns about slowing growth in China and other major economies have affected prices for oil, copper and other commodities, while the US dollar, a key destination for nervous investors, sits at its highest level in nearly nine months against a basket of currencies.
Even retail investors, a group that has backed rallies across everything from tech stocks to crypto over the past year, appear to be calming down. Online brokerage Robinhood, the gateway for many retail investors to so-called memes stocks, said on Wednesday that its clients would likely slow down their trading in the coming months.
Past warnings of an upcoming pullback have so far not come this year, and reducing exposure to equities has been a losing strategy as the market races from its 2020 lows, reinforcing the idea that there are few assets where investors have been able to nick the kind of returns seen in stocks. Nonetheless, looming risks have reinforced the view that markets may be more turbulent in the coming months.
âWe got past this euphoric type rally where everything, all asset classes and all stocks, continued to recover,â said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, who oversees around 3 billion dollars in assets. Now, “we have to be a little more selective”.
One of the main concerns for investors is the risk that the Fed, faced with higher than expected inflation, will start withdrawing support for the economy just as growth begins to ebb and the Delta variant of the coronavirus threatens. to cancel reopenings across the country.
âWe’ve had huge monetary support from the Federal Reserve for the economy for a while, so the market is worried about the Fed’s cut and what that will do for growth,â Rob said. Haworth, senior director of investment strategy at US Bank Wealth Management.
Investors will follow next week’s central bank symposium in Jackson Hole, Wyoming, to find out when the Fed will start slowing its purchases of US $ 120 billion of US government bonds.
Earlier this week, analysts at BofA Global Research advanced their timeline for the start of the Fed’s cut to November, compared to a previous forecast in January, believing that the minutes of the bank’s last policy meeting Central, released Wednesday, signaled a greater likelihood of an outcome starting this year.
Rich valuations are also giving investors pause. The 12-month forward S&P 500 P / E ratio stands at 21.1, a premium of over 34% over its 20-year average, according to Refinitiv Datastream.
Despite all of these concerns, many investors are employing strategies that will allow them to stick with stocks, which have benefited from ultra-low Treasury yields and exceptional growth in the United States.
Horneman, of Verdence Capital Advisors, added alternative investments such as certain liquid long-short hedge fund strategies that aim to be less correlated to the prices of stocks and bonds.
Greg Bassuk, managing director of AXS Investments, said interest has recently increased in liquid alternatives such as private equity and venture capital and strategies such as managed futures, which aim to hedging risks while maintaining exposure to equities. In the United States, inflows into these investments are at their highest level since 2013, The morning star said in July.
Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note Friday that investors should prepare for volatility by diversifying regions and asset classes, including hedge funds. Haefele said the S&P will finish next year at 5,000, up from 4,437.18 today, although he expects a bumpy run at those levels.
One of the main arguments for owning stocks has been the resilience of the market over the past decade, where investors have been widely rewarded for leaping at the chance when stocks weaken. For Horneman, this strategy remains in effect.
âWe are still in the mindset of buying down, not selling on force,â she said.