It's hard to remain cheery as economic conditions go soft, stocks bounce around with whiplash-inducing volatility and inflation remains stickier than superglue.
But there's hope for markets yet -- some economists say that these rough waters create new opportunities (along with some risks) for investors.
What's happening: The global economy is in a state of flux. The labor market remains strikingly resilient, but other economic indicators, like spending and manufacturing, are softening. And chaos in Russia has the potential to deliver another inflation spike if its vast commodity exports are disrupted.
Earlier this spring, central banks appeared to be pausing or winding down their year-plus regimen of painful, inflation-fighting rate hikes. But policymakers have recently changed their tunes and are warning investors that more pain is coming.
US stocks, meanwhile, have managed to pull up from their recent bear market into bull territory. But analysts still aren't sure that this isn't a bear in bull's clothing, and markets ended last week significantly lower, breaking a multi-week winning spree.
Still, there's good reason for investors to be optimistic, says Indrani De, head of global investment research at FTSE Russell. Macroeconomic signs are pointing to a renewed appetite for risk.
Before the Bell spoke with De, who outlined why she's positive on markets.
This interview has been edited for clarity and length.
Before the Bell: How are you thinking about inflation and bond yields?
Indrani De: Inflation is still high but it's the path that is important, and that path is clearly heading towards disinflation. Different countries around the world are at different points in their inflation journeys, which means we're at a point where there is a lot of dispersion between asset classes and between different countries. That increases the need for selectivity on the part of investors.
The second thing I want to highlight is that resilient economic growth in the US has led to higher earnings forecasts. Stocks have done particularly well since the US dollar fell from its recent highs in the last quarter of 2022. A weak dollar is really good for risky assets. It's really good for large cap stocks.
The market tends to focus on short-term policy rates. But what really matters most for equities and other risk assets is the longer, 10-year Treasury yield. That rate peaked in the early part of 2022 and has since come down a bit and stabilized. That stabilization has really brought back tech stock growth.
What about artificial intelligence? Is that causing froth in the markets?
It's not just cyclical factors like GDP holding up better than expected and corporate earnings revisions moving up. There is also a genuine hope that because of AI, we could be in the midst of a structural upgrade to economic growth prospects. This could be like the 1990s when internet stocks led to growth in the tech sector but then had ramifications for the entire economy.
In the 1990s, we used to say 'internet companies' because there were some firms that benefited from the boom. Gradually we dropped the 'companies' and started saying 'internet' because every company, every sector and every person felt its improvements across the economy. AI will begin narrowly, with some companies benefiting, but I expect that this whole concept of AI will become something that everybody can access. Everybody can utilize it to make improvements in their economies. So that's where the broadening out comes, but we're just in the early stages now.
There is a sense that AI could give us that next leg up in productivity, and productivity leads to economic growth.
Still, If the rally does not widen out beyond AI and this euphoria remains concentrated only in technology, then that is far more risky because ultimately, how large can any one industry grow in the overall stock market?
Are you at all worried about markets going forward?
I don't want to underplay the risks to stocks that remain. Valuations may have outrun their growth improvement prospects. There are certainly other risks in the economy: The manufacturing [purchasing managers' index] is slowing, there's extreme tightening in bank lending standards. It is a mixed picture on the macro front, but there are signs of optimism which is why we're seeing US equity markets rise higher.
Comments
Post a Comment