Pearls of the week: Risks to the dollar and the search for an equity trend


BofA shows what investors think should be the biggest risk to the dollar and what factors could drag its rate lower. David Zervos of Jefferies talks about the dovish shift in leadership of the US central bank. And what is the current trend in the stock market?

Shift at the Fed: Jefferies’ David Zervos believes Fed chief Powell’s latest speech was “the most dovish since this all started.” “He said the risk of monetary policy being too tight and too loose is now basically symmetrical, and that’s a new thing ,” thinks the strategist. According to him, the markets “applaud” such a manifestation, but at the same time it is still likely that the rates will remain “higher for a long time”.

BD8 Capital Partners’ Barbara Doran said she agreed with the strategist that Powell was speaking as if he were declaring victory. In addition, he mentioned continued strong economic activity and at the same time talked about tight financial conditions. At the same time, according to some estimates, they have a similar effect as several rate increases of 25 basis points.

Overall, the investor believes that the US economy may be headed for a soft landing, which is a positive scenario for stocks. They could also be helped by the profits of traded companies, which according to her could now grow by about 4% and even by 10% without energy. That would mean “the third quarter would be the first positive quarter in a year.” The outlook for companies is then “fairly decent” during the current earnings season.

What is the trend in stocks? also attaches 40-week and 200-week moving averages to stock price developments in the US market. According to her, the resulting picture demonstrates that the S&P 500 index remains on a long-term and cyclical growth trend. To this, BofA adds that if a strong seasonal development were to start now, it would confirm the above conclusions:


Source: X

But Interactive Brokers strategist Steve Sosnick presented a different view of the trend on Yahoo Finance. According to him, for the third month now, US stocks have been hitting both lows and highs, which “is the definition of a downtrend.” According to the strategist, this does not mean that a higher correction is necessarily coming, but “the setup is not much.” “We are not in a bear market, but the trend is not good,” says the expert, according to whom short-term sharp rallies are no exception in such an environment.

Can we now turn to the seven most popular stocks in the market in an effort to move to safe harbor? According to Sosnick, this seven cannot be taken as a unified whole, which is also shown by the latest results. For example, Alphabet has disappointed, but it may be doing well, and this also applies to Amazon, but “it has very high valuations”. Tesla is even in danger of “being kicked out of this club because it is doing quite badly after the results are published.” But according to the strategist, all stocks in this group are actually expensive, even compared to the price-to-earnings ratio of the rest of the market. This is a risk for investors who would focus on this group precisely in an attempt to find safety.

According to the expert, the real safe harbor is now short-term bonds and similar securities and investment instruments thanks to their yields. “Everything depends on the risk-free rates, which are currently at 5%. So the question is how much volatility are we willing to put up with in exchange for an asset offering more,” said the strategist. Among other things, this means that the stock market has significant competition in bonds today, which is a significant change in the investment environment. That doesn’t mean investors should shift everything to bonds, but they should be more selective about stocks.

Sosnick thinks value stocks may be more interesting in the stock market today. This is because they can to some extent reflect the onset of a downward trend in prices and valuations, but this is not the case with popular growth stocks, according to him. How do they see passive investments in the stock market now? “There’s nothing wrong with it,” he replied, but the problem is that many funds and strategies in this area are heavily skewed towards the largest companies. It reflects the overall structure of the index, but in practice it means that a few of the largest companies have a large share of the whole.

Therefore, passive investing may not bring as much diversification as it might seem at first glance. In this context, the strategist gave the example of the difference in the returns of the consumer goods and consumer durables sectors. In the second case, the return is significantly influenced by only two stocks, i.e. and , which make up approximately 40% of the capitalization of the sector.

Risks to the dollar: As part of its survey of investors, BofA also asked about the “biggest risks to the US dollar”. That is, on the factors that would drag its rate downwards. As the picture shows, the most weight is placed in this context on the possibility of a hard landing of the American economy, which would lead to a sharp turn in the policy of the central bank and a drop in rates. More specifically, to rate declines faster than other G10 countries:
Source: X

Investors also see deteriorating data from the US economy or “significant and coordinated stimulation in China” as a risk for the dollar.

The article is in Czech

Tags: Pearls week Risks dollar search equity trend


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