A big sale in the auctions. Technology stocks fell. The collapse of cryptocurrencies. The highest inflation in four decades.
Amidst a grim and uncertain climate, we asked six financial heavyweights to share their thoughts on the state of the markets, how they’ve weathered this year’s disaster and what they predict for the future.
Market observers disagreed on some key issues. Jeremy Grantham, best known for predicting the market crashes of 2000 and 2008, gave plenty of reason to be pessimistic even after the initial burst of what he called a “superbubble.” Investment pioneer Rob Arnott, founder of Research Partners, agrees that the market has yet to bottom out. Lloyd Blankfein, former chief executive of Wall Street Goldman Sachs Group Inc.,
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says things are not as bad as they seem.
Most people agree that this wild ride will not be pleasant anytime soon.
Wait for the ultimate fear
Investors should wait until the market bottoms out to buy, says Mr Arnott. And in his opinion, this has not happened yet.
Buy early, and your investments will drop further. Buy too late, and you’ll miss your best chance to win.
US stocks still look expensive for Mr Arnott, a pastor’s son who turned a love of computers, mathematics and research into an investment consultancy business. He is known in his industry as the “god of smart beta,” a reference to funds that allocate money based on factors such as companies’ dividend payments, sales, or volatility.
The problem is, identifying the moment of peak panic — when investors are so pessimistic, prices have nowhere to go but up — almost always depends on guesswork, Mr. Arnott said.
He is convinced that US stocks have not reached their peak. Why? The Shiller price-to-price ratio — a measure of overall market value named after Nobel Prize-winning Yale economist Robert Shiller — shows that equities are still overpriced. The S&P 500 is trading well below its peaks during the dot-com bust and post-pandemic rally, but well below the range reached during the worst of the 2007-09 financial crisis. This does not seem to mean that investors have reached the point of capitulation.
“They call me permabear,” he said. “But I’m a bear on things that aren’t expensive. I don’t want to bother buying them, even if they go up.”
Things are not as bad as they seem
Mr. Blankfein, who led Goldman Sachs through the brutal financial crisis of 2008-09, said the market outlook may not be as dire as many believe.
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“The bad news is so concentrated that people underestimate the fact that there is some reasonably good news that can positively affect the market,” he said, referring to a change in Russia’s approach to the war in Ukraine, the release said. the increase of oil by Saudi Arabia and the suspension of rate hikes by the Fed. “Markets are not just looking at the current economy, they are looking ahead.”
Sales this year have been similarly punishing for many companies, he said. “Get back into the ones you wanted to have but were too expensive.”
Mr. Blankfein said it’s worth remembering that the challenges of the moment always seem worse than the past, if only because the past is resolved. And history, like markets, has cycles.
“You think things have never been so scary?” Mr. Blankfein, who retired from Goldman in 2018, said: “Really? When we stopped Soviet ships in international waters, we had the Cuban missile crisis. Are these really the most polarized times? I was in 1968, when there were assassinations of public figures, when kids were blowing up draft centers, and the National Guard was shooting up campuses. We got through it, we’ll get through it.
“It’s never as bad as your worst fears or as bad as your best hopes,” he added.
Prepare for more chaos
Volatility is here to stay. That’s the view of Paul Britton, founder of investment firm Capstone Investment Advisors and someone who bets on haywire swings across global markets.
He expects interest rates to rise to keep the mix going, with several corners of the market spared from the pain. Even bonds, often thought of as a safer investment than stocks, have become more volatile.
This makes many investors’ portfolios riskier than they appear, says Mr Britton. The yield on the 10-year Treasury note, generally considered ultrasafe, has posted some of its biggest one-day moves in a decade in recent months.
This turbulence, he said, means investors need to rethink what will buffer their portfolios and consider holdings outside of stocks and bonds. “The strategies that worked best in the past 15 years are not necessarily the strategies that will work in the next 15 years,” Mr. Britton said. “There’s a structural change that we haven’t seen in decades.”
At his firm, which oversees about $8.9 billion in assets and manages money for pension funds and utilities, Mr. Britton says he is particularly bullish on a so-called diversification strategy designed to take advantage of volatility. is Mixed tactics use options to predict how stocks will move up and down together.
“This is one of those times where I think it’s important to be bold in your decision,” Mr. Britton said.
Inflation will not disappear
Investors believe inflation will disappear soon, says Nancy Davis, founder of asset management firm Quadratic Capital Management LLC, which oversees about $1.2 billion. They should not, in her view.
Inflation hit a four-decade high this year as the price of everything from livestock to gas soared. Federal Reserve Chairman Jerome Powell has made it clear that he expects that situation to change. He even stopped using “valid” when discussing the issue, saying about 11 months ago that “it’s probably a good time to retire that word.”
“The Fed retired it, but the market is still overpriced for the time being,” said Ms. Davis, who warned of inflation risks early in 2021.
It pointed to the fact that inflation expectations among investors have fallen this year, even though data on consumer prices show steady gains. According to Tradeweb, a broad measure that tracks the annual inflation expectations of investors in the middle of the next decade – the five-year inflation rate – stood at around 2.6%. Year-over-year inflation is now more than 8%, well below the Fed’s target of 2%. That means investors expect inflation to decline over the next five years, she said, and bond market investors may be too confident that a Fed rate hike will eventually reduce inflation.
He prepares to invest mostly in inflation-protected bonds and options linked to interest rates in the $1.1 billion Quadruple Interest Rate and Inflation Hedge Exchange-Traded Fund, where he is a portfolio manager. . If inflation does not decrease, these positions will serve as a hedge, she said.
The ‘super bobbula’ is still exploding
Mr. Grantham is legendary for spotting bubbles before the market crashes. He did this before the tech stock crash of 2000, and before the financial crisis that began in 2008.
Co-founder of investment firm Grantham Mayo Van Otterloo & Co. drew renewed attention this year when he said US markets were experiencing a “super bull” in the early stages of a nasty deflation. Nine months after that statement, Mr Grantham remains very pessimistic.
“This is such a bad package [of fundamentals] like we’ve ever seen,” says Mr. Grantham, who is chairman and long-term investment strategist for his firm, which managed $59 billion as of June 30. That’s true even though economic growth has slowed, inflation has returned and interest rates have retreated after a long slide that helped lift stocks for decades.
Mr. Grantham has put his money into a family foundation that allocates about half of its assets to young companies developing green technology, another 25% to other early-stage businesses and the remaining 25% to several different ventures, including one one that gains when the Nasdaq Composite declines in value and another that gains when investors see the risk of rising corporate volatility.
For average investors, he says, cash holdings are among the best options. He refutes the mantra that you shouldn’t try to time the market, pointing to several examples from history when it took years, or even decades, for markets to recover from crashes.
The link should return
Bond had his worst year on record. That’s one reason to be optimistic about the year ahead, according to the man in charge of overseeing about $2.3 trillion for the world’s largest money manager.
“I’m more excited about going into 2023 than I have been in a very long time because we’re going to have a lot of different opportunities,” says Rick Rieder, BlackRock. Inc
chief investment officer of global fixed income.
Investors often value bonds with good credit ratings for their safe returns. However, Bloomberg’s Aggregate U.S. bond index is down 16 percent this year — its worst performance ever.
Problem: To fight inflation, the Federal Reserve is raising interest rates at a historic pace and promising more ahead. It reduces the value of bonds that were held when rates were low.
Bond investors, Mr. Rieder admits, were hopeful earlier, only for worse inflation reports to further damage their portfolios. But he now sees clear signs that higher rates are beginning to have their intended effect of slowing the economy. That means the Fed may not need to raise rates much more than it is already projecting.
The good news for investors is that lower bond prices mean higher yields, or better future returns. This is true for old bonds that have fallen in value and new bonds that have been issued at higher interest rates.
Mr. Rieder says, because prices are unlikely to drop like before, “you can feel good about actually buying triple-A homes with these varieties.”
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