Stocks Prove Resilient Against Central Bank Measures

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UBS’s chief investment officer for wealth management, Mark Haefele, has revised his outlook on stocks, realizing that they are faring better than anticipated. Initially, there were concerns that global central banks’ efforts to combat inflation would negatively impact the U.S. economy and drag down stock markets.

Haefele acknowledged that some damage was incurred as a result of the central bank measures, likening it to a dance with elephants. Major stock indexes experienced a lackluster summer performance. However, overall, the risks of central bank rate hikes on the global economy were overestimated and stocks were underestimated.

With this new perspective, UBS now sets a target of 4,700 for the S&P 500 index SPX by the end of June 2024. This forecast suggests a total return of 7%-8% from current levels. UBS has considered various economic scenarios in formulating this projection.

Equities Struggle in August

August has been a challenging month for equities, with U.S. stocks facing significant losses. As of the latest data from FactSet, the S&P 500 was down about 4.9% for the month, trading below 4,370. The Nasdaq Composite Index also experienced a decline of 7.4% in August, while the Dow Jones Industrial Average was 3.1% lower.

Uncertain Economic Outlook

According to Haefele, the uncertain economic environment has prompted UBS to make strategic moves earlier this year. They took advantage of higher yields and focused on “collecting income from bonds.” However, Haefele now believes that it is time to shift the focus to stocks in portfolios over the next six to 12 months. He sees the potential for a “softish” landing for the economy, considering the receding inflation and the growth of the U.S. economy, despite the Federal Reserve aggressively raising interest rates to a 22-year high.

Balanced Approach

While UBS acknowledges the attractiveness of stocks, they still hold a positive outlook for bonds. The team estimates that investment-grade government and investment-grade debt could generate total returns of up to 10% through mid-2024. They expect lower volatility in bonds, which supports their ongoing preference for bonds over equities.

In conclusion, August has been a turbulent month for equities. UBS sees the potential for stocks to have a more prominent role in portfolios in the coming months, given the evolving economic landscape. However, they still maintain a favorable view on bonds due to estimated returns and lower volatility.

The Benchmark Yield on Treasury Bonds Surges to Its Highest Level Since November 2007

The benchmark 10-year Treasury yield (BX:TMUBMUSD10Y) has recently experienced a significant surge, surpassing 4.3%. This surge brings the yield to its highest level since November 2007. However, as of Friday, the yield has retreated slightly to approximately 4.25%.

This sudden increase in the benchmark Treasury yield has caught the attention of financial experts and investors alike. It reflects a notable shift in the bond market, indicating rising interest rates for long-term government debt. Such movements in yields have implications for a variety of sectors, including housing, lending, and investment.

Though the yield has pulled back slightly, it remains at a historically elevated level. Market participants closely monitor these changes as they could potentially impact borrowing costs for consumers and businesses. Additionally, these developments may shape investment strategies and influence asset allocation decisions.

Investors and financial analysts will continue to monitor the trajectory of the benchmark 10-year Treasury yield, observing how it may further impact the broader financial landscape and economic outlook.

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