By Ksenia GalouchkoInvestors are starting to doubt that Jerome Powells magic dust can keep working miracles in equities.The United States Federal Reserves remarkably dovish stance got a polite but restrained nod from markets on Wednesday after trade tensions and profit woes returned to center stage.
The SP 500 Index fell 0.8 percent over the five days while the Stoxx Europe 600 Index posted the worst week this year as focus shifted to slowing economic data and President Donald Trumps decision to keep China tariffs.Yes, investors are surely grateful to Powell for this years $10 trillion global stock rally.
But its not in the Feds power to reduce geopolitical risks, and for the rally to continue, earnings upgrades are needed ASAP, according to Karen Ward, chief market strategist for Europe, Middle East and Africa at JPMorgan Asset Management.
Analyst downgrades of global profit growth have outpaced upgrades since August, showing no signs of stopping.Valuations arent helping, either.
On a forward price-to-earnings basis, both the SP 500 and MSCI World Index now trade near the levels they were at during the height of last years market rally.
Back in December, they bottomed out near the lowest multiples since 2013.The valuation story in stocks that we saw at the start of the year is no longer compelling, Ward said.
Its very helpful if Powell pauses interest rates from here but theres nothing he can do to determine whether the trade hostility eases or continues, and really its that thats depressing global growth.Traders are starting to vote with their feet.
After a short-term inflow into equities earlier this month, stock funds across all the major regions saw $21 billion exit in the week through March 20.
Many investors have remained on the sidelines of this years rally after being burned at the end of 2018 and have turned to bonds in search of yield and defensive positions.Bank of America Merrill Lynch strategists including Michael Hartnett went so far this week as to say that the gains in stocks have been driven solely by corporate buybacks, call options, short-covering and purchases of single stocks by retail investors -- and not by general investor appetite for equity risk.And major asset managers are starting to reduce their equity exposure.
Joh Berenberg Gossler Company KG scaled back its stock positions closer to neutral in recent weeks and UBS Global Wealth Management in March took profit on the global equity overweight amid concerns about economic growth.To be sure, as we approach the end of a quarter thats set to be the SP 500s best since 2009, sentiment is becoming more cautious but is nowhere close to the gloomy mood seen at the end of last year.At Wells Fargo Asset Management, Brian Jacobsen, a senior investment strategist, said that although his multi-asset team has recently reduced its equity position from overweight to neutral, in the longer run the dovish monetary environment remains supportive of stocks.The run-up to first-quarter earnings season could likely be a little rough going, but the weakness will likely be temporary, Jacobsen said.
Were still off the previous highs, but investors can ignore the Feds downward revisions to growth because the Fed has finally stopped ignoring the slowdown.HSBC Private Bank and State Street Global Advisors remain bullish on global equities but that doesnt mean they recommend indiscriminate buying.
State Streets head of investment strategy and research for EMEA, Altaf Kassam, said that hes hopeful the rally has legs as United States unemployment is near historic lows and there is optimism over a United States -China trade deal.
Still, the company has been selling United States small-cap shares on the deterioration of the global growth outlook and acquiring emerging-market stocks.Ultimately the gains could end if the tariff war fails to be resolved.
The trade deal with China is getting very close but this doesnt mean we get there, Trump said on Friday.Setbacks on the political front cannot be ruled out and valuations of risky assets are no longer cheap, said Sylvie Golay Markovich, head of financial markets strategy at Credit Suisse Group AG.
We thus consider it prudent to remain neutral for now.