Big investors say US markets rally could prove short-lived
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[November 22, 2023] By
Carolina Mandl, Svea Herbst-Bayliss and David Randall
NEW YORK (Reuters) -The recent rally that has lifted U.S. stocks and
bonds is more of a year-end rebound than a turning point, according to
big money managers, who see fiscal and monetary policies, next year's
presidential election and recession fears as likely to start weighing on
markets.
Since late October, the S&P 500 has rallied roughly 10% and the Nasdaq
has surged 13%, as investors increased bets that the Federal Reserve's
tightening cycle is over after signs of cooling inflation and job growth
and a better-than-expected third-quarter earnings season.
Ten-year Treasury yields hit a 16-year high of 5.021% in late October,
but have fallen back to 4.414%. Lower yields have driven a
technology-fueled equities rally.
Some big investors and advisers believe, however, that reasons to cheer
are short-lived and growing concerns over the economy will start
weighting on asset prices early next year.
"We've started seeing some signs that things are a little weaker than
what people may believe," Ryan Israel, chief investment officer of Bill
Ackman's Pershing Square Capital Management, told clients last week,
adding the main focus now is where the economy is heading.
Markets may have “gone too far in extrapolating” rate cuts in early 2024
from recent data suggesting that consumer inflation is falling and the
U.S. labor market is weakening, said Mohamed El-Erian, an adviser to
financial services firm Allianz SE.
While inflation has become less front-and-center after U.S. consumer
prices were unchanged in October, on investors' minds is the fallout
from the Fed's 525 basis points in total interest rate hikes since March
2022 coupled with the central bank's efforts to reduce its balance
sheet, under its so-called quantitative tightening.
Overall, growth in the global economy is expected to slow in 2024, hit
by elevated interest rates, higher energy prices and cooler growth in
the world's two largest economies, the U.S. and China. Most economists,
however, believe the world will avoid a recession.
"I don't think that the market is going to dodge a very aggressive Fed
tightening cycle and then continued quantitative tightening environment
without a little bit of damage coming sometime next year," said Peter
van Dooijeweert, head of defensive and tactical alpha at Man Group's
Solutions unit, which creates portfolios for clients. His focus now is
more on earnings, credit markets and broader economic data for signs of
a potential slowdown.
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The New York Stock Exchange (NYSE) in New York City, U.S., February
24, 2022. REUTERS/Caitlin Ochs/File Photo
The U.S. presidential race next year is also a concern because it
could be a source of more market instability. "As we get into 2024,
with a general election that's going to be extremely contested, I
think we're going to see more risks there," said Max Gokhman, head
of MosaiQ investment strategy at Franklin Templeton.
MAGNIFICENT SEVEN
One of the biggest sources of uncertainty for investors is the
performance of the so-called Magnificent Seven group of very large
companies, which have driven stock indexes this year.
Bill Gross, the co-founder of bond giant Pimco who now manages his
own money and that of his foundation, told Reuters in an email that
the drop in yields has largely benefited technology stocks, which
are also riding investor enthusiasm for artificial intelligence. But
he sees little room for the 10-year Treasury yield to move lower at
4.45%. "Do not look for yields to be a contributing factor in the
future," he said.
For a new boost in market performance, tech stocks will depend more
on showing how AI can lift results, investors said. Last month,
Microsoft quarterly results beat Wall Street sales estimates, with
its cloud computing and PC businesses growing as customers
anticipated using its AI offerings.
"The market might be too optimistic about how much of the AI boom is
really going to contribute to the bottom line of earnings of the
Magnificent Seven," said van Dooijeweert.
A Reuters poll on Tuesday showed that strategists estimate the S&P
500 will end next year only about 3% higher than its current level,
as they fear an economic slowdown or recession.
"I think it would be important to hold your convictions quite
loosely as you go past New Year's Eve," said Gokhman, of Franklin
Templeton.
(Reporting by Carolina Mandl, David Randall and Svea Herbst-Bayliss;
Editing by Megan Davies and Leslie Adler)
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