MW Here's the scenario that 'nobody's really prepared for,' says UBS Wealth's CIO
By Barbara Kollmeyer
Critical information for the U.S. trading day
It's been a roller coaster week for earnings and data, though Microsoft and Alphabet results are cheering up tech. Just ahead is the Fed's preferred inflation gauge, on the heels of "worst of both worlds" GDP data.
That brings us to our call of the day and an investor blind spot from UBS Global Wealth Management's chief investment officer, Mark Haefele.
"I think it is this stagflation question, that the economy starts to slow and inflation rises...I'm not worried about one data point, but nobody's really prepared for that scenario, and that's difficult to hedge," Haefele said in a Friday interview with MarketWatch.
In a nod to stagflation chatter after Thursday's GDP, he said it's "such a fear that any whiff of it makes people stand up and the market react...but the data since COVID has gotten worse not better, and so you really have to look at trends."
For example, the economy has changed in terms of workers, with the gig economy making headline data a bit more unreliable. "You can't look at one GDP print and say anything with definition."
An optimist, Haefele's sees inflation easing up in the latter half of the year, allowing for Fed rates cuts. And he doesn't see the U.S. diverging wildly from the global picture, where inflation has decelerated around the world as COVID supply shocks have lessened.
But how can investors shield themselves anyway? He suggests "quality stocks that have strong balance sheets that can kind of weather a slowdown and don't need to worry as much about refinancing in the near term, and then have that pricing power. That's your best protection," he said.
"The risk case is that the U.S. economy remains hotter and inflation remains hotter for some time," he said. "And that gives us a real preference for both quality stocks and bonds, but I would say quality bonds, investment grade bonds of a five-year duration. It's going to be very hard for clients to lose money there."
He said yields would have to rise pretty high before investors lose money - his bear case is 6%, which would spark a stock selloff, but he expects the 10-year BX:TMUBMUSD10Y will fall to 3.85% by year's end.
As for those "quality stocks," Haefele looks for "companies with very strong recurrent balance sheets, recurring revenues, pricing power," that works particularly in higher-for-longer inflation scenarios. And lots of tech stocks meet the quality definition, he says.
But Haefele is trying to reach beyond Big Tech big names, toward midcap tech stocks, and tech innovation in healthcare, decarbonization, automotive manufacturing, tech services, etc. "For us, it's getting harder to pick sectors or regions."
Haefele doesn't see the AI trend repeating the internet boom of 1999 that eventually busted. "As we talk to clients and...businesses, we're really seeing that the switch onto AI and what it can do for businesses is kind of just getting started," he said. "We see it in our own work, our increasing use of AI and we hear that a lot from clients and firms we work with."
But there's good enough reason to try to look beyond those big names.
"With high priced AI stocks, they will be punished if they miss lofty earnings expectations that is the downside risk. However, there is also an upside risk we have seen before in tech where investors have a propensity to look at the longer term growth story and price it all in now. That's is part of our upside risk scenario where the markets exceed our expectations," he said.
"In other words, there's certainly room for a valuation spike to kind of nosebleed levels. We don't think it's there yet," he said.
What will get him to swing more optimistic on the S&P 500 SPX this year? "If we get through this earnings season and we're confident that earnings growth is going to continue...and that the Fed feels like it can act toward September, then I think we could see ourselves getting more optimistic about stocks," said Haefele, whose end-year target is 5,200.
On the bearish side would be a shift in longer-term inflation expectations, real or nominal rates moving "significantly higher that we think it's going to materially choke off the economy."
Read: The timing may be just right to buy Nvidia or other semiconductor stocks
The markets
Stock futures (ES00) (YM00) are pointing to a bounce after Thursday's decline, with tech (NQ00) set to lead. Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y are steady, gold (GC00) is climbing and the dollar $(USDJPY.FOREX)$ is atop -Yen156 after the Bank of Japan didn't budge on interest rates.
Keep up with all the market action via MarketWatch's live blog.
The buzz
The Fed's preferred inflation indicator, the core PCE index, is due at 8:30 a.m., and some fear a hot reading. Follow along with MarketWatch's Live Blog. Final consumer sentiment is due at 10 a.m.
Late Thursday, Google parent Alphabet $(GOOGL)$ reported big jumps in revenue and net income and its first-ever cash dividend, with shares up 11%. Microsoft shares $(MSFT)$ are up near 4% on forecast-beating results and Azure cloud-computing revenue.
Intel shares $(INTC)$ are down 8% after the chip company's revenue slightly missed forecasts.
Phillips 66 (PSX), Chevron $(CVX)$, Exxon $(XOM)$ and Colgate-Palmolive $(CL)$ will report ahead of the open.
Anglo American (UK:AAL) rejected a $39 billion bid from mining giant BHP $(BHP)$.
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-Barbara Kollmeyer
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April 26, 2024 06:45 ET (10:45 GMT)
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