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April 3, 2019, 9:37 a.m. EDT

U.S. stocks ‘vulnerable to a correction,’ warns top asset manager

Critical information for the U.S. trading day

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By Barbara Kollmeyer, MarketWatch


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Now for the bad news...

Is it really “endgame” time on the U.S.-China trade front?

If you believe a report that a deal is 90% of the way there, then maybe. No matter, because global equity markets, that never seem to tire of getting juiced by trade hopes, appear to be buying this latest development on Wednesday.

“The reports are not necessarily out of the blue and we’ve known this week’s talks are happening, but on something so significant, investors want to be constantly reassured, “ Craig Erlam, senior market analyst with Oanda, tells clients in a note.

And no matter that some Wall Street analysts can’t shake their caution and just embrace the idea of bull year No. 11. There may be one tiny crack on the surface, though, as noted by Cracked Market blogger Jani Ziedins who says “now that prices are a lot higher, it is harder to find people willing to chase stocks.”

Count Luca Paolini, chief strategist at Pictet Asset Management, who provides our call of the day , among them. He told clients in a note that “equities are a turnoff,” with Pictet moving to an underweight position on the asset class and overweight on cash.

“With developed economies under pressure and corporate profit growth slowing, prospects for most stock markets look uninspiring,” said Paolini, who says he just doesn’t think equities can repeat the “stellar performance” seen since the late 2018 selloff.

He’s least excited about Wall Street: “The U.S. stock market looks the most vulnerable to a correction; not only is it the most expensive in our scorecard, but profit margins among U.S. companies look set to contract from record highs of 11%.” Backing this up, he cited data from the National Association for Business Economics Survey showing that nearly two-thirds of U.S. companies have reported higher wage costs.

Here’s a snippet of their chart that shows the regions they like best with regards to stocks. The U.K., for example, is stocked with defensive names that have been unfairly tainted by Brexit, while emerging markets have resilient growth, low inflation, weak-dollar boost going for them.

And markets appear to be underpricing the risk of a recession, says Paolini. Whether or not that pullback is coming, is a major debate for investors, though the IMF, for one thinks it isn’t. Cyclical equity sectors and high-yield U.S. credit, in particular, are underestimating the potential effects of a slowdown, he says.

What does Pictet like? Defensive stocks, such as health care and utilities, but steer clear of the two “most expensive industries” right now — goods and services that consumers don’t view as essential, and technology, they say.

Read: Here’s one way for investors to bet that global economic growth is bottoming out

The market

The Nasdaq /zigman2/quotes/210598365/realtime COMP +0.07% , S&P 500 /zigman2/quotes/210599714/realtime SPX +0.0020%  and Dow /zigman2/quotes/210598065/realtime DJIA -0.19%  are higher at the start of trade. More coverage in Market Snapshot

The dollar /zigman2/quotes/210598269/delayed DXY +0.21% is down, while gold and crude are up.

Europe stocks /zigman2/quotes/210599654/delayed XX:SXXP +0.30%  are on a fourth day of gains. Asian equities were mostly higher, lifted by upbeat talk over a trade deal. Data showed a private indicator of China’s service sector hit a 14-month high. The Shanghai Composite /zigman2/quotes/210598127/delayed CN:SHCOMP +0.24%  led with a 1.2% gain.

Bitcoin /zigman2/quotes/31322028/realtime BTCUSD -0.62%   is up again after a big day on Tuesday.

The chart

If the economy is indeed in and end-cycle phase, the question is which stocks are a better bet? Our chart of the day, ( h/t The Daily Shot ) from BlackRock, shows developed markets have managed the best returns, followed by emerging markets:

/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
8,182.88
+5.49 +0.07%
Volume: 1.58M
Sept. 19, 2019 5:16p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,006.79
+0.06 +0.0020%
Volume: 1.55B
Sept. 19, 2019 5:17p
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,094.79
-52.29 -0.19%
Volume: 216.44M
Sept. 19, 2019 5:17p
loading...
/zigman2/quotes/210598269/delayed
US : U.S.: ICE Futures U.S.
98.48
+0.21 +0.21%
Volume: 0.00
Sept. 20, 2019 8:31a
loading...
/zigman2/quotes/210599654/delayed
XX : STOXX
392.97
+1.17 +0.30%
Volume: 0.00
Sept. 20, 2019 2:26p
loading...
/zigman2/quotes/210598127/delayed
CN : China: Shanghai
3,006.45
+7.17 +0.24%
Volume: 18.21B
Sept. 20, 2019 3:01p
loading...
/zigman2/quotes/31322028/realtime
US : CoinDesk
10,203.24
-63.38 -0.62%
Volume: 0.00
Sept. 20, 2019 8:40a
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