Big investors say US markets rally could prove short-lived
12:38 PM UTC – November 22, 2023
NEW YORK (Reuters) – Big money managers believe that the recent rally in U.S. stocks and bonds is just a year-end rebound and not a turning point. They foresee fiscal and monetary policies, next year’s presidential election, and recession fears starting to weigh on the markets.
Since late October, the S&P 500 (.SPX) has experienced a rally of approximately 10%, while the Nasdaq (.IXIC) has surged 13%. This surge is attributed to investors betting that the Federal Reserve’s tightening cycle is over, following signs of cooling inflation, job growth, and a better-than-expected third-quarter earnings season.
Ten-year Treasury yields reached a 16-year high of 5.021% in late October but have since fallen back to 4.414%. The decline in yields has fueled a technology-driven equities rally.
However, some big investors and advisers believe that the reasons for celebration are short-lived. They anticipate growing concerns over the economy to start impacting asset prices early next year.
“We’ve started seeing some signs that things are a little weaker than what people may believe,” said Ryan Israel, chief investment officer of Bill Ackman’s Pershing Square Capital Management, in a recent client update. He emphasized that the main focus now is the direction of the economy.
According to Mohamed El-Erian, an adviser to financial services firm Allianz SE (ALVG.DE), the markets may have ”gone too far in extrapolating” rate cuts in early 2024 based on recent data suggesting falling consumer inflation and a weakening U.S. labor market.
While inflation has become less prominent after U.S. consumer prices remained unchanged in October, investors are concerned about the impact of the Federal Reserve’s 525 basis points in total interest rate hikes since March 2022, coupled with its efforts to reduce its balance sheet through quantitative tightening.
Overall, economists expect global economic growth to slow in 2024 due to elevated interest rates, higher energy prices, and cooler growth in the U.S. and China. However, most economists believe that a recession can be avoided.
“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.
The upcoming U.S. presidential race in 2024 is also a concern, as it could introduce 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
Investors are particularly uncertain about the performance of the so-called Magnificent Seven group of very large companies, which have been driving stock indexes this year.
Bill Gross, co-founder of bond giant Pimco, stated that the drop in yields has primarily benefited technology stocks, which are also benefiting from investor enthusiasm for artificial intelligence. However, he believes there is little room for the 10-year Treasury yield to move lower at 4.45%.
For tech stocks to continue performing well, they will need to demonstrate how artificial intelligence can contribute to improved results. Last month, Microsoft’s quarterly results exceeded 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 showed that strategists estimate the S&P 500 will only end next year 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,” advised 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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What factors are causing big money managers to be skeptical about the sustainability of the recent rally in U.S. stocks and bonds?
Klin Templeton. He suggests being cautious and flexible in investment decisions as the new year approaches.
CONCLUSION
While the recent rally in U.S. stocks and bonds has brought optimism to the market, many big money managers are skeptical about its sustainability. They believe that factors such as fiscal and monetary policies, the upcoming presidential election, and recession fears will start to weigh on the markets next year. The decline in yields and the surge in technology stocks are seen as merely temporary, and concerns about the economy and the impact of interest rate hikes remain. Overall, economists expect global economic growth to slow in 2024, but most believe that a recession can be avoided. As the new year approaches, it is advised to maintain caution and flexibility in investment decisions.
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