Recent market returns suggest investors are prepping for weaker US recovery, UBS says

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  • Recent financial market returns point to investors shifting cash to safe havens and growing more concerned about a slowing economic recovery, Jason Draho, head of asset allocation in the Americas for UBS, said Monday.
  • After the September tech-stock correction ended, investors lifted long-dated Treasurys, the US dollar, and large-cap growth stocks. Cyclical assets including gold, small-caps, and high-yield bonds sank.
  • The shifts “are consistent with investors seeking (relatively) safe assets as concerns rise about moderating growth and inflation disappointment,” Draho said.
  • Market participants can expect high growth uncertainty to “delay a sustained rotation towards more economically-sensitive assets,” Draho added.
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September brought heightened stock market volatility and a mass rotation out of tech giants, but the most recent week of returns signals a new concern gripping investors.

Returns across the stock, bond, currency, and commodity markets point to increasing risks to economic growth and inflation, Jason Draho, head of asset allocation in the Americas at UBS, said in a Monday note. Last week saw investors pivot back to long-dated Treasurys, the US dollar, and large-cap growth stocks.

More cyclical assets such as small-cap stocks, emerging market equities, gold, and high-yield bonds all tumbled over the period. Inflation expectations fell and 10-year real rates climbed slightly, reflecting a more bearish outlook toward price growth.

The returns data can easily drive “spurious conclusions,” but the shifts “are consistent with investors seeking (relatively) safe assets as concerns rise about moderating growth and inflation disappointment,” Draho wrote.

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Those investors aren’t without cause for concern. While some facets of the economy have roared back to their pre-pandemic highs, others remain mired in the coronavirus pandemic’s fallout and have slowed their pace of recovery. New US jobless claims unexpectedly climbed to 870,000 filings for the week ended September 19, missing the economist estimate of 840,000 claims. Nonfarm payrolls data slated for release on Friday is expected to show the unemployment rate fall through September, but by a much smaller amount than in months prior.

Gauges of consumer spending also point to a stagnating rebound. Retail sales climbed by just 0.6% in August, missing the consensus estimate of 1% growth and halving from July’s 1.2% uptick.

Investors’ moves to safe havens are even more justified when looking ahead, Draho said. Hopes for new stimulus ahead of the November US presidential election are all but entirely dashed, with both parties’ proposals still far from meeting in the middle. Rising COVID case counts in Europe recently renewed concerns of partial economic lockdowns, and cases are steadily rising in the US as well. Lastly, the Federal Reserve’s latest policy meeting left some wanting greater detail around the central bank’s forward guidance. 

In all, concerns of slowing economic growth “are likely to linger for at least a couple of months,” Draho said. The upcoming election is set to push volatility higher, and uncertainties around the rollout of a coronavirus vaccine will keep some from returning to financial markets.

Risk appetites could improve in early 2021 if Congress passes new stimulus and a vaccine wins regulatory approval, but investors shouldn’t get their hopes up for a near-term reversal from last week, Draho said.

“For now, expect structurally high growth uncertainty to keep volatility elevated and delay a sustained rotation towards more economically-sensitive assets,” he added.

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