Bloomberg / New York
Covid cases are skyrocketing around the world. The stimulus effect on the economy is fizzling. Inflation has just popped.
There’s a lot to make investors nervous right now and it’s showing up in financial markets. In the US, investors are diving back into their pandemic favourites, sending the Nasdaq 100 Index to new records, and cash poured into bond and money-market funds last week.
Plenty of investors say they’re looking for refuge. Pictet Wealth Management is picking large companies over small. Janus Henderson Investors has been reducing allocations to the UK and Europe in favour of Japan.
“The momentum is with the variant rather than the vaccines,” said Paul O’Connor, head of multi-asset at Janus Henderson in London. “It’s quite reasonable to expect maybe a lengthy consolidation phase until we get the all clear on the Covid front, and to me that might take a couple of months.”
Markets have long been able to take the pandemic in stride, safe in the belief that vaccines and government stimulus will pave the way back to normal life. But with cases soaring again and Apple Inc even delaying its office reopening, the trajectory no longer seems as certain.
There’s also price pressures to consider. In an interview on Bloomberg Television, Ed Hyman, chairman at Evercore ISI, predicted that US inflation will likely exceed expectations and present a challenge for the Federal Reserve.
“We got a confluence of all these effects, so the market doesn’t really know: are we opening up again or are we not? Is it inflationary now? Is it deflationary?” said Randeep Somel, a fund manager at M&G Investments in London. “The best place to be probably is in quality growth companies.”
Moderna Inc, Twitter Inc and Facebook Inc led gains in the S&P 500 this week as traders snapped up Internet and biotech stocks.
On the opposite end of the equity spectrum, the Russell 2000 Index and S&P 500 Value Index have been treading water for weeks.
Investors added $13bn into bond funds and cash in the week through July 21, compared with $3.3bn of inflows to stocks, according to data from Bank of America Corp.
Still, hardly anyone believes there’s enough bad news to end the bull market. The argument often coming from investors instead is that, given the current landscape of record high prices and stretched valuations, it’s only prudent to be more cautious now.
“There are just some factors that are going to restrain the market,” said O’Connor of Janus Henderson. “It doesn’t make us bearish. We’re not calling a top of the markets here.”
The pessimism is also showing up in strategist views. Morgan Stanley told investors to buy US staples and cut back on commodity shares. Bank of America strategists said the US recovery looks “increasingly tired” and pared their stance on European stocks to neutral.
In the mind of Nigel Bolton, co-chief investment officer of BlackRock’s Fundamental Equity Group, now’s the time to lock in profits on the winners and shift to more stable companies, like big tech and pharma.
“There is a big question mark around when is the next variant that may need the boosters and will we have it,” said Virginie Maisonneuve, chief investment officer of global equities at Allianz Global Investors. “I would not bet everything on cyclicals.”
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