The nearing fall will see demand for equities fading and bonds strengthening as fears of recession and tightening monetary policy by the Federal Reserve.
After a savage first half, the markets are poised for a rebound. The spark is due to resilient quarterly earnings. The hope of cooling inflation will lead to Fed delaying another hike to avert the economy’s decline.
The US stocks saw one of the best summers with a 12 % advance this month and the previous one. Company bonds gained3.4 % globally and 4.6% in the US after bottoming out in Mid-June.
The two are now set to diverge after they have moved along together. Bonds look better placed to continue with the rally to offset the risk of an economic downturn.
Equities Rebound
The global chief investment strategist with BlackRock Inc., Wei Li, said the economic outlook is hazy after Federal Reserve officials said they were not keen to stop the policy tightening even if it means economic pain.
Investing in government bonds offers safety and benefits debt from investment grade companies. However, in the case of stocks, the risks about earnings are what investors do not want.
The earnings in the second quarter helped restore faith in the corporate US and Europe, with companies proving their demand was strong enough to pass on higher costs to consumers. Also, broad economic indicators such as the labor market hold up firmly.
Economists have forecast that business activity is set to slow down from here. Strategists feel companies would find it tough to raise prices to keep their margins intact, threatening second-half earnings. Beata Manthey, a strategist at Citigroup, sees earnings falling 2% and 5% in 2022 and 2023, respectively.
Even as Bank of America’s fund manager’s latest global growth survey finds investors less pessimistic, the sentiments remain bearish. According to strategist Michael Hartnett, very few fear the Federal reserve now after the recent inflows in bonds and stocks.
Hartnett recommends investors book profits if S&P 500 index goes over 4328 points. This is 2 % higher than the present levels. Technical indicators are pointing to a resumption in the decline of US stocks.
There is, however, one trade that can provide support to equities. The growth stocks, including tech giants Amazon.com and Apple Inc., are seen as good picks. This group has recently led the stock market rally, and JPMorganStrategists expect it to keep going up.
Advantage Bonds
The company’s borrowing costs look set to play in the hands of investors. Corporate yields consist of rates paid similar to government debt. When the economy falters, these building blocks move in opposite directions. The flight to quality of bonds is important to cushion any blows that may arise if firms cannot repay their debts during the recession.
According to Vontobel Asset Management portfolio manager Christian Hantel, the potential damage to investment grade companies will be limited.
