Market sentiment is in a flutter.
U.S. stocks plunged and then rebounded Wednesday after central banks in New Zealand, India and Thailand cut interest rates amid continued uncertainty over the U.S. trade war with China.
Tensions between Beijing and Washington have been escalating this week, signaling high risks of volatility in the market. As trade fears intensify, investors are trading stocks for safer assets like gold and Treasury yields.
With concerns a global economic slowdown is approaching and no trade deal in sight, experts worry there will be more pain in the market.
Here’s what five experts are watching now:
David Herro, chief investment officer and partner at Harris Associates, said market volatility is something investors have to be ready for.
“You never really know what actually triggers these things. But, we as investors have to expect them. The European Central Bank has had a very low to negative rate policy for a while. And the fact is, that these banks had been able to supplement earnings through other ways, either by cost cuts or marketing investment products, or other types of fee-based income. As result, despite the low interest rates, we have seen acceptable levels of earnings. And to me, this has meant that these banks are yielding anywhere from 8, 9, 10% — safely.”
Brian Nick, chief investment strategist at Nuveen, thinks there is a 1-in-3 chance of a U.S. recession in the near future.
“I think the reason that the attention that we’re paying is more to the bond market than the equity market at this point, is because the central bankers have gotten out in front, a bit. We haven’t seen major economies falling into recession yet. The U.S. looks like it’s still pretty far from recession. We think it’s only about a 1 in 3 chance over the next year, and you need to see the trade-war escalate in order for that to become a big risk. But, because you have central bankers cutting rates … last week we were talking about the Fed … why are they cutting rates? Is this a preemptive measure? Now it looks like they should have done 50 [basis-points cut]. And the problem is, looking at the probabilities, if the Fed just delivers on what the market is expecting, it’s not going to have an impact. Even the announcement … of additional rate cuts, at this point is not going to be helpful. So, do they come out with a surprise? Do they come intra-meeting? Do they go 50 in September? I think these things all have to be on the table, if they want this to have an impact. But, I think they do have to give some lip service to the reason we are doing this, is because of the uncertainty that is being created by trade. Not just the sort of the mathematical damage from the tax-increases themselves, but the uncertainty we are creating down the road for lack of investment and potentially in the third quarter now, lack of consumer spending. ”
R. Burns McKinney, portfolio manager at Allianz Global Investors, said there are two places he’s going into as safe havens, amid constant uncertainty in the market.
“There’s obviously no place to hide within equities on a day like this. And this is a continuation of what we’ve seen for quite some time of these binary markets where you basically have either monetary policy or trade policy … steering the markets right and left. To some degree, you have stocks moving so much together that it makes it harder and harder to find companies that are trading on their own fundamentals. I think that a lot of the defensive sectors have been bid up to the point where if you go to defensives, well you’re paying so much for that insurance that it loses a lot of its defensive nature. And so, I think probably one of the first places we’re suggesting investors look, and that we’re going into are both divided payers and really specifically companies that are growing their dividends. Dividend paying names tend to be a little bit less volatile than the market. And they do offer stability in this type of situation. And just, look for company specific stories. Places like, for example, the defense sector is one place that investors might look, where you do have that stability, but they haven’t been bid up to the same degree that consumer staples or even utilities have.”
Aakash Doshi, commodities analyst at Citigroup, is bullish on gold and thinks the gold market will only keep rising.
“What we’re seeing broadly across the OECD [Organization for Economic Cooperation and Development] and emerging markets is clearly a bullish factor for gold. But, it’s not just nominal yields that matter. If you look at even in the U.S., real yields at the belly of the curve, if you look at the 5-year and 10-year sector—we’re already approaching zero. And in that context, we haven’t been there since 2016. And I think that’s a very favorable environment for gold, which I would model as a long-duration, zero coupon asset. So, gold is really benefiting from this central bank easing. Just one more point on the central bank side globally, it’s not just that central banks are cutting rates in this environment, but it’s also the fact that the central banks are buying record amounts of gold. If you look in 2018, you saw over 650 tons of net purchases from central banks. … In the first-half of this year we saw 374 tons. So, we’re already on pace to eclipse my 700 ton central bank forecast for net gold buying in 2019. So, this is a very constructive environment not only from a rates channel, but also from an official sector purchase channel. ”
Art Cashin, director of floor operations at UBS, said the response of central banks has been unlike anything he’s seen in the past.
“We had central banks begin to cut a bit more aggressively than people thought, particularly the New Zealand bank and they began talking about rates possibly going ultimately negative. And that would have strong implications for Australia, and maybe even in Canada—and that brings us much closer to home. And what happened then, was rates around the world began to accelerate to the downside, and that basically spooked the equity markets. There was this ‘Wait a minute, what’s out there? You know, what’s happening? Is there something bigger than I see?’ And that’s what took us down. You can go back to the ancient Sumerians, trading commodities, and we’ve never seen negative rates.”
