Stocks closed at the highest in a month as data showed a decline in inflation expectations and big banks rebounded from losses driven by worrisome outlooks. Treasuries retreated.
Ahead of Monday’s US holiday, the S&P 500 crossed its 200-day moving average and finished within a hair of 4,000.
JP Morgan, Bank of America, Citigroup and Wells Fargo, which reported results, pushed higher.
The Nasdaq 100 climbed for a sixth straight day, the longest winning run since November 2021 — the month when it hit an all-time high.
“While equity and bond markets are overbought in the near term and potentially exposed to a pullback and/or a period of volatility, there are reasons for cautious optimism for the year,” said Mark Hackett, chief of investment research at Nationwide.
US short-term inflation views fell in early January to the lowest in nearly two years, providing a bigger-than-expected boost to consumer sentiment.
To Jeffrey Roach at LPL Financial, pricing pressures are weakening across many sectors, paving the way for the Federal Reserve to downshift its pace of hikes to 25 basis points at its next gathering.
“We shouldn’t be surprised if the Fed starts talking about pausing in the near future,” he said.
Fed Bank of Atlanta president Raphael Bostic told CBS News he’s leaning towards supporting a smaller rate hike at the next meeting following Thursday’s report showing a further slowing in prices.
Over the next few weeks, traders will get a sense on how the aggressive Fed policy to tame inflation has weighed on profit margins.
JP Morgan’s boss Jamie Dimon said that while the economy remains strong, “we still do not know the ultimate effect of the headwinds coming”.
Corporate earnings have yet to fully reflect the impact of last year’s rate hikes, according to Mark Haefele at UBS Global Wealth Management.
He expects fourth-quarter results to provide a “reality check”, with an earnings recession in 2023 being probable.
To Peter Oppenheimer at Goldman Sachs Group, there’s an important distinction between financial markets and the economy.
“We do have a relatively positive view on economies globally: in fact, we are not looking at a recession in the US this year,” he told Bloomberg Television.
“Because of that strength, interest-rate risk remains higher than the market is pricing. And that’s what feeds into a more cautious view for equity markets.”
S&P 500 earnings revisions are pointing to “a hard landing”, even though the market is pricing in a soft landing, Goldman Sachs strategists led by David Kostin wrote.
If there is no recession, as the team expects, S&P 500 earnings per share growth will be flat this year, they said.
US stocks are poised for a fresh slide before ultimately rallying in the second half of the year when economic conditions stabilise, according to Bank of America strategists.
“It’s a back-and-forth market,” said David Donabedian, chief investment officer of CIBC Private Wealth US.
“I don’t really buy the intense gloom that some people have that it’s going to get much worse, or the other extreme that we’ve already started a new bull market. I don’t think we’re there yet either.”
Former Treasury Secretary Lawrence Summers said that the US economy is still facing a recession this year, despite encouraging news in recent weeks.
“We’ve been in the inflationary bus, which is a fancy way of saying stagflation, and that’s not a great environment for financial assets,” said Jack McIntyre, portfolio manager at Brandywine Global.
“Equities don’t like the slowing economic activity and bonds don’t like the inflation part of it. So, we should get resolution this year on how do we break out of that stagflationary environment.”
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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