By Chris Matthews, MarketWatch
U.S. companies will begin reporting third quarter earnings in a few short weeks, giving investors some hard numbers to parse as they navigate the final quarter of the year.
But according to Mark Haefele, global chief investment officer at UBS market watchers would be wise to keep in mind several macroeconomic factors including international trade tensions, a manufacturing sector slowdown, and central bank policy, which will set the tone for the broader market as individual companies report.
“First, we expect continued uncertainty over trade to limit the upside for stocks, at least in the short term,” Haefel wrote in a note to clients. While “the eventual outcome will be key for investors,” Haefel is not confident that a resolution providing certainty over future trade policy will be reached in the near term, and believes that tariffs set to go into effect in December will be instituted.
“Against this unpredictable backdrop, we expect stocks to remain range-bound, and we hold a modest underweight to equities.”
During the first three quarters of the year, the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.06% rose 18.7%, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.17% added 15.4% and the Nasdaq Composite index /zigman2/quotes/210598365/realtime COMP -0.87% rose 20.6%.
Nevertheless, he says that relative to the rest of the world, U.S. stocks are the place to be. “In terms of markets, we prefer the US over Eurozone stocks,” he wrote. “The US market is less exposed to a manufacturing slowdown than the Eurozone market, which has a heavier weighting to industrials.”
The euro area’s manufacturing sector slumped in September as German factories experienced their worst month since the depths of the 2008 financial crisis. IHS Markit’s index for manufacturing in the euro region came in at 45.7 last month, the lowest level since October 2012, according to data published on Tuesday.
But the real gains will be made, Haefel predicts, in the bond market and with other income-generating investments. Even though bond prices have rallied all year, and “markets are now pricing in negative ECB rates for more than a decade to come,” he still sees upside for these instruments as both the Fed and the ECB appear set to continue to flood the market with stimulus.
“While risk-free yields are low or negative, we see opportunities for investors in US dollar-denominated emerging market sovereign bonds and in Treasury Inflation-Protected Securities (TIPS), which can benefit from easier monetary policy,” Haefel said.
The iShares JP Morgan USD Emerging Markets bond ETF /zigman2/quotes/202964510/composite EMB -0.21% gained 9.1% through Monday’s close, while the SPDR Portfolio TIPS ETF /zigman2/quotes/203715485/composite SPIP -0.26% added 6.7%.