Look for stocks to struggle on Tuesday, as oil slumps again on the heels of a historic collapse.
“Having decided they could weather the coronavirus crisis, equities now have to reckon with an entirely different problem,” notes Chris Beauchamp, chief market analyst at IG.
Add a layer of geopolitical uncertainty to that via reports that North Korea’s dictator Kim Jong Un is ill after heart surgery, and then the worries that governments will move too fast to restart coronavirus-battered economies.
All of the above equals reasons to be wary about the gains stocks have seen recently. In that camp is our call of the day from a team of Bernstein analysts, led by Inigo Fraser-Jenkins, who says the best approach to stocks right now is a slow and easy one.
“We remain frankly suspicious of the rally, but also recognize that the uncertainty about the economic impact of different possible strategies for easing of lockdowns makes tactical timing very hard, thus a phased approach to buying back into risk assets over time may make most sense,” Fraser-Jenkins tells clients in a note. He suggests that investors do this over several months.
“The bottom line is that given we are facing the deepest recession and highest unemployment rate since the war, and equities were not exactly cheap before the virus hit, we think it unlikely that we get away with ‘only’ a 17% fall in the S&P.
“We think we will face an extended period of higher volatility and think it highly likely that we see a pullback in the near term as the difficulties of exiting lockdown (or the risk of a reimposition of lockdown) become apparent,” he says.
Fraser-Jenkins see three possible reasons stocks have gained:
1) Early talks of easing lockdowns in Italy and Germany are giving investors the false impression we’ve passed the point of maximum uncertainty;
2) The Federal Reserve and governments around the world are seen as doing enough to support risk assets;
3) Or TINA — “there is no alternative” to buying equities.
The Bernstein strategists don’t seem terribly convinced of any of the above.
“Medium term, we are more constructive and we think that equities and gold are the two best assets to hold,” they say.
This article originally appeared on MarketWatch.
