© Reuters. FILE PHOTO: Traders wearing masks work the floor of the New York Stock Exchange (NYSE) in New York, the United States, on the first day of personal trading since it closed during the coronavirus disease (COVID-19) outbreak in New York, the United States, May 26. February 2020. REUTERS / Brendan M
By Saqib Iqbal Ahmed
NEW YORK (Reuters) – Investors prepare for a rockier road for markets as worries of slowing growth, an impending pullback in the US Federal Reserve's monetary policy, and a global COVID-19 resurgence threaten a rally that threatens has doubled compared to the last time, annual lows.
There are many signs of caution even as US stocks hover near record highs. Goldman Sachs (NYSE 🙂 economists recently lowered their tracking estimate of US economic growth in the third quarter from 9% to 5.5% due to the impact of the Delta variant, while fund managers surveyed by BofA Global Research said that They moved the cash overweight to its highest level since October 2020, while adding positions in defensive sectors such as healthcare and utilities.
Concerns about slowing growth in China and other major economies have pushed oil and other commodity prices down, while the US dollar, a major target for nervous investors, is at its highest level in nearly nine months versus a basket of currencies.
Even retail investors, a group that has supported rallies from tech stocks to cryptocurrencies over the past year, seem to be cooling their heels. Online broker Robinhood (NASDAQ :), the gateway for many retail investors in so-called meme stocks, said Wednesday that its clients are likely to slow their trading in the coming months.
Earlier warnings of an impending pullback have not caught on so far this year, and reducing equity exposure has been a losing strategy during the market run from its 2020 lows, reinforcing the idea that there are few assets to score for investors could be the type of return that can be seen in stocks. Nevertheless, the looming risks have supported the assessment that the markets could become more turbulent in the coming months.
"We are through this euphoric rally in which everything, all asset classes and all stocks continued to rise," said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, which has approximately $ 3 billion in assets. Now “you have to be a little more picky”.
One of the main concerns of investors is the risk that the Fed will cut back its support for the economy in the face of unexpectedly strong inflation just as growth slows and the delta variant of the coronavirus threatens to cut back openings across the country.
"We have had such tremendous monetary support from the US Federal Reserve to the economy for some time now, so the market is terrified of the Fed throttling and what it will do for growth," said Rob Haworth, senior investment strategy director at the US Bank wealth management.
Investors will be watching the central bank symposium next week in Jackson Hole, Wyoming for clues as to when the Fed will begin slowing its $ 120 billion purchases of US Treasuries.
BofA Global Research analysts earlier this week postponed their schedule for starting the Fed's throttling to November, based on an earlier forecast made in January, believing the minutes of the central bank's last monetary policy meeting released on Wednesday to signal a greater likelihood of easing earlier this year.
The high valuations also make investors pause. According to Refinitiv Datastream, the price-earnings ratio of the S&P 500 on a 12-month forward basis is 21.1, which corresponds to a premium of more than 34% compared to its 20-year average.
Despite all of these worries, many investors are adopting strategies that allow them to stick with stocks that have benefited from extremely low US Treasury bond yields and outstanding US growth.
Verdence Capital Advisors' Horneman has added alternative investments like some liquid long-short hedge fund strategies that aim to be less correlated to the prices of stocks and bonds.
Greg Bassuk, CEO of AXS Investments, said interest in liquid alternatives like private equity and venture capital, as well as strategies like managed futures that aim to hedge risk while maintaining exposure to stocks, has increased lately. In the US, inflows into such facilities are at their highest level since 2013, Morningstar said in July.
Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a statement Friday that investors should prepare for volatility by diversifying across regions and asset classes, including hedge funds. Haefele said the S&P will close at 5,000 next year, down from 4,437.18 today, despite anticipating a bumpy spike to that level.
One of the main arguments in favor of owning stocks has been the resilience of the market over the past decade, where investors have largely been rewarded for getting into stocks when stocks are falling. For Horneman, this strategy remains in place.
"We're still on the buy-on-dip mentality rather than the sell-on strength," she said.