Global equity markets are off to a shaky start in early 2024: UBS

Fed easing to support quality bonds and equities alike in 2024

Equity markets are off to a shaky start in early 2024, said UBS Global Wealth Management. “At the end of US equity trading on Thursday, 10-year US Treasury yields had risen 20 basis points since December to return to 4 percent, while the S&P 500 had declined 2 percent over the same time period,” UBS said in a note. Investors also dialed back the probability of an early rate cut by the Federal Reserve to a market-implied probability of 66 percent that the Fed will ease policy at its March policy meeting, down from 86 percent at the end of last week.

This appeared to contribute to a third straight daily decline in the S&P 500, the first time since 2015 that the index has kicked off the year with back-to-back falls. This was part of a broader risk-off move. High yield credit spreads also widened, typically a sign of rising risk aversion, UBS continued.

But UBS believes that the latest moves are largely a reflection of how far markets rallied in the final two months of 2023. The latest Fed minutes, while indicating some caution over the pace of cuts, continued to back the view that easing is on the way this year. The overall tone of the minutes released on Wednesday was less dovish than Fed Chair Jerome Powell’s remarks at the press conference following the December meeting, at which he pointed out that policymakers had started to discuss lowering rates. Among the more hawkish elements in the minutes, it was revealed that many policymakers felt that the swift fall in government bond yields, leading to an easing of financial conditions, could make it more difficult for the Federal Open Market Committee to reach its inflation goal. However, such comments were balanced by the observation by a number of participants that “downside risks to the economy” would arise if rates were kept restrictive for too long, UBS said.

With rate cuts likely still ahead, Mark Haefele, chief investment officer at UBS Global Wealth Management, continues to see upside in fixed income. “Quality bonds look set to gain further as economic growth moderates and rates fall, and their advance would likely be even more pronounced in the event of a hard landing. That said, markets continue to imply a faster pace of Fed easing than we anticipate, raising the risk of disappointment. Therefore, investors should be able to look for more attractive entry points given the potential for periodic rises in yields over the coming months,” Haefele said.

The prospect for rate cuts should also support stocks, though against a backdrop of more moderate growth. UBS continues to favor quality stocks – those issued by companies with strong balance sheets, high returns on invested capital, and a track record of delivering earnings. As indicated last November, UBS expects Fed easing to support quality bonds and equities alike in 2024.

UBS’ views were echoed by RBC Wealth Management on Friday, who also suggested caution on equities in 2024. RBC WM maintains market weight positioning in equities overall, which attempts to balance the risks of a US recession against the possibility that one may again be averted. The firm recommends tilting portfolios towards higher-quality segments of the equity market, including those companies with resilient balance sheets, sustainable dividends, and reliable cash flow generation.

They are not alone in their views. According to Andrea Seminara, CEO and CIO of Redhedge, investors need to exercise prudence and discernment in their investment decisions. “The emphasis should transition from broad market movements to specific risks and individual asset exposures. The importance of investing in high-quality assets is underscored, as they are considered to hold value, unlike their lower-quality counterparts,” Seminara said.