Stock markets ignore ‘white list’ of risks, strategist says

Stock markets are ignoring a “laundry list” of potential risks during their recent bull run, and a major downturn could be in store, according to Julian Howard, chief investment officer for multi-asset solutions at GAM Investments.

Despite the risks associated with a sharp rise in interest rates over the past 15 months, tech stocks in particular have led the charge so far this year, as investors scrambled to gain exposure to the tech boom. ‘IA.

THE Nasdaq 100 closed Friday’s session up 33% on the year, while S&P500 is up more than 11% and the pan-European Stoxx 600 added just under 9%.

Still, in light of the latest round of economic data, economists are starting to raise the likelihood of further interest rate hikes from the US Federal Reserve as the US economy and labor market remain resilient, while core inflation turns out to be more rigid than expected.

Howard told CNBC’s “Squawk Box Europe” on Monday that given this risk, the Nasdaq is “very expensive” at the moment, and that now is the time for investors “to wait rather than commit.” massively in this market”. “

“There’s this long list of issues, and interest rates and inflation haven’t gone away. The debt ceiling is done, and I think there’s a feeling that actually the markets need to refocus on inflation and rates again,” Howard said.

“The American consumer is quite ambivalent about inflation, they kind of expect higher inflation now, and that’s dangerous because that itself entrenches higher inflation, because obviously expectations drive to higher inflation.

Further increases in borrowing costs would also increase discount rates, a measure used by Wall Street to value stocks by determining the value of future earnings. That wouldn’t bode well for tech stocks that have been much of the recent driving force in U.S. equity markets, as higher discount rates generally lead to lower future cash flows.

The Fed has raised benchmark interest rates 10 times since March 2022 in an effort to combat stubbornly high inflation.

Some Fed policymakers have in recent weeks expressed a willingness to pause the cycle of rate hikes at the central bank’s June meeting, and the market is now pricing in about an 80% chance of that outcome, according to the CME Group’s FedWatch tool. However, several Fed officials and economists have hinted that further monetary tightening may be needed later in the year.

“This AI tech trade started to fade in the second half of last week, and I think it could continue, because if you think about it, long-lived assets like tech stocks, they are most sensitive to the price of silver, to the prevailing discount rate,” Howard said.

“If that discount rate starts going up because investors feel that in fact the Fed isn’t done after all, then we could have a pretty big correction, so we’re just a little bit cautious there in regarding the next few weeks and months.”

GAM sees a gloomy long-term macroeconomic picture in major economies, with secular stagnation as the base case scenario. He believes that the “Goldilocks” environment for equities that has prevailed since October is no longer sustainable.

Although at odds with much of the consensus on Wall Street, Morgan Stanley also predicted in a research note last week that a slowdown in real and nominal growth in the United States would lead to sharp downward revisions to earnings forecasts, which would dampen the stock market rally in the United States.

The Wall Street giant expects earnings per share to be about 16% below last year’s results and current consensus in 2023, before recovering in 2024.

Morgan Stanley strategists said a variety of “global” indicators continued to advise investors to take a “defensive stance”.

“Our US cycle indicator, bank credit conditions, yield curve, commodity prices, indices of leading economic indicators and the unemployment rate all suggest future equity returns below average and higher returns average for higher quality bonds,” they said.