Wells Fargo says there are risks to shares going forward
There is a risk that stocks will go downhill from here, according to Wells Fargo’s Paul Christopher, as he warned investors not to chase the current rally. Paul Christopher, head of global market strategy at the Wells Fargo Investment Institute, says he is not convinced the US central bank will cut interest rates, or even hold them. “The markets have been trying to convince themselves that interest rates were going to come down, that the Fed and central banks around the world weren̵[ads1]7;t going to raise as much as they have,” he told CNBC’s “Squawk Box Asia” on Thursday. “Even if the Fed holds off next week, we don’t think the Fed will hold off for very long — inflation is just too sticky.” Christopher added that he does not think the Fed will cut interest rates this year. The central bank will meet on 13 and 14 June. The strategist also highlighted a number of ongoing problems in the economy: emergency loans are on the rise, inventory levels are still too high in some segments, and earnings are not stumbling. fully priced into most cyclically oriented sectors. He added that tighter credit conditions after the banking crisis are also contributing to a decline in lending activity. “There is probably more downside risk in stocks at this point (aka don’t chase this stock rally),” he wrote in notes sent to CNBC. “The markets are too complacent in our view.” History shows that the S&P 500 doesn’t bottom until an average of six months after the first rate cut, Christopher said. U.S. indexes have rallied this year, with the S&P 500 hitting a new 2023 high on Thursday. It is up almost 13% so far this year, while the technology-heavy Nasdaq has risen 27%. However, the rally has been narrowly focused, with gains driven by just a few major tech stocks. Christopher noted “a really strong bid” going into artificial intelligence and technology-related stocks, but said there will be bad news for such stocks as the Fed continues to raise interest rates. “So what happens when we get another rate hike? … What happens when the Treasury starts removing liquidity? By issuing a ton of new T-bills to fill up their coffers,” he told CNBC. “Interest rates are rising, especially at the long end, plus the liquidity is leaving the market, and that’s going to leave a lot less speculative energy for the very few stocks that are emerging in this realm.” Lower prices tend to be good for growth stocks like technology, as they rely on borrowing heavily to fuel future growth and are seen as longer-duration assets. The higher interest rates go, the lower the present value of their future income stream. “It’s the tech stocks or the big names that have really underperformed, will have the long end and all this liquidity, and we think that’s coming to an end,” Christopher said. How to Position As such, Christopher says investors should remain defensive when it comes to equities and fixed income. He urged them to take profits in technology and reinvest in sectors such as health care and energy. “Recently, we took additional defensive steps, specifically to reduce overall portfolio risk by reallocating some capital from US equities to [short term] fixed income and [developed market] shares,” he said.
