It’s going to remain tricky for investors to pick stocks for the rest of this year because markets are still hooked on unpredictable economic data, according to UBS.
The Swiss bank’s CIO Mark Haefele expects the choppiness stocks seen in the early months of 2023 to continue, thanks to traders’ fixation on the rate of inflation and unemployment.
“So far, 2023 has been a much better year for asset class returns, with the S&P 500 up 7.5% year-to-date, but has been characterized by ever-changing market narratives,” Haefele wrote in a note Wednesday.
The investment chief was referring to the benchmark US stock index’s rebound this year from a plunge of 18% in 2022.
“The potential remains for this data-dependent market to keep jumping from one narrative to another for the rest of the year,” he added. “This should make it difficult for investors to navigate the coming months.”
The note comes ahead of the release later Wednesday of the monthly Consumer Price Index report, which will show how much US inflation rose in March. His bank believes the CPI will come in at 5.1% – down from 6% in February, but still far off the Federal Reserve’s 2% target.
Markets will stay unpredictable even if inflation cools for a ninth month in a row, according to Haefele, because investors are still struggling to make sense of the US labor market.
Friday’s nonfarm payrolls report showed the US economy added 236,000 jobs in March, its lowest print since December 2020. Investors are divided on whether that’s good or bad news.
“While the optimistic interpretation of this data is that the tightness in the labor market is easing as the balance of supply and demand of labor improves, the pessimists view it as the first cracks that could be followed by much greater deterioration in the coming months,” Haefele said.
Worries about an economic slowdown could soon replace inflation tracking as a key focus, UBS’s investment chief added.
Economists have warned that the Fed’s year of aggressive interest-rate hikes will likely soon start weighing on growth – and that slowdown could drag on stocks by chipping away at listed companies’ earnings.
“As inflation eases, growth may take over as the more dominant concern, perceived or otherwise,” Haefele said.
“The optics of a decline in headline CPI to 3% may reinforce the view that growth, rather than inflation, will be driving Fed decisions and the market’s performance,” he added.