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Wall Street’s New Concern Is That Economic Growth Has Peaked

Investment strategists are starting to consider a new bearish scenario: the economy has already hit its speed limit.
Bloomberg
By Bloomberg
20 Jul
Shoppers As Consumer Prices In U.S. Top Forecast People wearing protective masks carry shopping bags while waiting to cross Geary Street in San Francisco, California, U.S., on Thursday, June 10, 2021. Prices paid by U.S. consumers rose in May by more than forecast, extending a months-long buildup in inflation that risks becoming more established as the economy strengthens.

With the ferocious spread of Covid-19’s delta variant and central banks already talking about tighter monetary policy to bring inflation under control, there’s a sense of worry that financial markets have become too optimistic.The shift in narrative was evident across assets on Monday: the S&P 500 sank the most since May and benchmark Treasury yields tumbled to the lowest level since February. Stocks slipped again in Asia Tuesday but the fall was orderly. U.S. equity futures rose and Treasuries trimmed their climb, signaling some calm after yesterday’s volatility.“The recent weakness is justified on a short-term basis,” Jim McDonald, Northern Trust Bank chief investment strategist, said on Bloomberg Television. “If you look at the issue with the delta variant and Covid, it is a short-term concern, but if you look out to the end of the year most of the Western economies will have immunity in the 75% to 80% range.”

Investors had earlier delighted in the prospect of a strong worldwide economic rebound fueled by easy money and vaccine rollouts. But the combination of price pressures and soaring infection rates raises the risk that growth could fall short of rosy forecasts. And with global equities teetering at all-time highs, there’s no room for error.

Investors soured on U.S. small-caps relative to defensive megacap tech

In the minds of some investors, the moves represented a pullback in overextended areas of the market, like cyclicals. Others pointed to the usual volatility that comes with earnings season and thin summer trading.

“While macro conditions remain overall supportive for equities, valuations, seasonal trends and positioning leave the room for price corrections and volatility spikes” like Monday’s, said Antonio Cavarero, head of investments at Generali Insurance Asset Management.

Other strategists urged clients to use the weakness as a time to buy.

“I am firmly in the buy the dip camp,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets. “Stocks had a very strong first half supported by the earnings recovery and we expect corporate earnings to remain strong.”

For Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, there’s still a worry that growth expectations are too high. China’s regulatory crackdown on its technology sector and U.S. consumers saving more than they spend are among the key risks, he said.

S&P 500 Index peaked twice with real dividend yield falling below -2%

Global Growth Boom May Disappoint, Morgan Stanley’s Sharma Warns

Stalling vaccination rates, especially in the U.S., are also dragging down market sentiment, wrote Deutsche Bank AG’s George Saravelos. At the same time, rising prices have caused consumer demand to stall in many economies.

“This is part of broader post-Covid scarring; it is also part of bottleneck demand destruction,” he wrote. “This is the opposite of what one would expect if the environment was genuinely inflationary. It shows the global economy has a very low speed limit.”

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