FILE PHOTO: A man points to a computer screen with inventory information in this illustration photo, taken in Bordeaux, France, March 30, 2016. REUTERS / Regis Duvignau
May 18, 2021
By David Randall and Maiya Keidan
NEW YORK (Reuters) – US investors, grappling with recent stock volatility and signs of inflation, say they positioned themselves for more unexpected issues along the way to rebound.
The drive to hold assets that could withstand a sustained surge in inflation came as data earlier in the week showed that US consumer prices rose by the largest amount in 12 years in April, well above Wall Street’s expectations lay. Bottlenecks in global supply chains and the scarcity of the labor market were one of the reasons for the price increase, according to data from the Ministry of Labor.
Another wrinkle for investors trying to steer economic reopening is the Federal Reserve, which is expecting a “temporary” surge in inflation, meaning interest rates will rise more slowly to offset persistently low inflation over the past decade.
“What we’ve learned in the past 24 hours is that the inflation amplitude is going to be more important than anyone thought and it’s too early to say how persistent it will be,” said Bob Miller, head of America’s Fundamental Fixed Income at BlackRock said on Thursday. “That will be the debate over the summer.”
Miller, who said his company holds more cash than usual, expects the combination of Fed policy and signs that inflation is rising above expectations to lead to more instability in financial markets next summer and fall in the fall if not dialed back. ”
In the past few weeks there have been indications of more cautious behavior. Investors invested $ 57.3 billion in cash in the final week of April, the largest inflow in cash since March 2020, followed by the largest weekly inflow in gold in three months in the first week of May, according to Bank of America Global Research .
“The surge in inflation we anticipate will be bigger and bumpier than expected,” said Brian Nick, Nuveen’s chief investment strategist, who has increased his weighting in small-cap stocks and is investing in emerging market stocks in anticipation of reflation over the rest of the year.
“We are not dealing with runaway inflation, but we are dealing with the fact that everyone has a different definition of what ephemeral means,” he said.
Fears of inflation weighed on stocks this week, particularly growth stocks. Overall, the benchmark index S&P 500 is down about 3% from its record high earlier this month, and the Nasdaq is down about 7% from its recent high, which partially rebounded on Thursday after sharp falls earlier in the week.
“I think every portfolio manager, every growth stock manager out there is trying to figure out … are we getting closer to the bottom, are we going to retrace another 25%? For this reason, the market moves back and forth, ”said Brad Gerstner of the hedge fund Altimeter Capital at the Sohn conference on Wednesday.
Garrett Melson, portfolio strategist at Natixis Investment Managers, said the reopening of the global economy will most likely take longer than many investors anticipate, leaving the recent rotation of the market into cyclical stocks with a “sizeable runway,” he said.
For example, the Russell 1000 Value Index is up 15.5% over the year to date, while the Russell 1000 Growth Index is up 2.8% over the same period.
Some investors worried about inflation prefer inflation-linked securities to government bonds, and returns on 10-year TIPS are close to a three-month low. The 10-year benchmark returns have stabilized after rising in the first three months of the year.
“The recent preference for TIPS is a confirmation that inflation could potentially pick up and if it does pick up it could last longer than the market or the Fed is expecting,” said Jim Besaw, chief investment officer at GenTrust Wealth Management, in anticipation expanded its positions in commodities and regional banks during a long period of higher inflation.
Not every prominent fund manager is this concerned. Cathie Wood, whose ARK Innovation ETF was the top performing U.S. equity fund last year, said in a webinar Tuesday that continued innovation will make deflation a bigger force than inflation in the years to come.
Indeed, the inflation picture is difficult to read.
“It’s hard to tell what’s really going on,” said Gregory Peters, head of multisectoral and strategy for PGIM Fixed Income. “You have so many interruptions in the utility line, you have data problems, you have work disruptions.”
(Reporting by David Randall in New York and Maiya Keidan in Toronto; Additional reporting by Kate Duguid in New York; Editing by Megan Davies and Matthew Lewis)
This article originally appeared on www.oann.com