Stephen Mulholland says it's probably a good time to reduce exposure to the stock market.
The CIO of Mulholland & Kuperstock, which has $40 million in assets under management, said last week that he is reducing stock market exposure in the firm's fund, the MKAM ETF (MKAM), in half, from 32% to 16%.
The reasons he listed are twofold: Risk-free Treasury yields are now much more attractive than they have been in the past two decades, and the economy will almost certainly begin to slow as the Federal Reserve keeps rates high. of interest.
Treasury rates are now elevated across the board as the yield curve begins to flatten and longer-term rates continue to rise. Here's where the annualized returns were at various durations on Friday afternoon:
- 3-month invoice: 5.43%
- 1 year invoice: 5.29%
- 2-year note: 4.84%
- 10-year note: 4.57%
Treasury bonds are considered risk-free assets because they are backed by the United States government, which has never defaulted on its debt. Given bonds' lack of risk and the substantial returns they offer right now, and how richly valued stocks are, Mulholland believes stocks will face headwinds going forward.
Here's the current equity risk premium, which is how much the S&P 500 is expected to return annually over the next decade in excess of the 10-year Treasury note. Right now, it is below 1%, the lowest level in two decades and approaching levels seen during the dot-com bubble.
Rosenberg Research
"Investors are waking up to a new day when they can finally earn a safe return on cash and bonds. U.S. Treasury bills pay more than their historical average, 5.5%," Mulholland said in a recent note. . "Stocks remain atypical, with prices consistent with the old world, where investors had to take risks to generate returns."
As for downward pressure on the economy, Mulholland said the effects of higher interest rates would continue to manifest in several ways.
One of them is the stagnation of the housing market, with potential sellers hesitant to get out of their low-rate mortgages and affordability for buyers is the worst in four decades by many measures. Housing improvements would also slow amid higher rates, he said.
Businesses will be more hesitant to borrow money to expand so much amid higher rates, Mulholland said, and banks will be less likely to lend money. This is reflected in data from the Federal Reserve's Opinion Survey of Senior Loan Officers: About half of banks now say they are tightening lending standards for lending to small businesses. That rate is also similar for large companies.
Federal Reserve Bank of St. Louis
Given his bearish outlook for stocks, Mulholland said most investors would be in trouble because most have greater exposure to stocks than bonds. For investors who may need access to their money in the stock market in the short term, he recommended moving it into short-term Treasury bills.
"Investors who make regular withdrawals or have large liquidity needs on the horizon would do well to reduce their exposure to the stock market now," Mulholland said. "It is obvious that the economy will slow down and that the overall direction of the stock market is bearish."
Is a recession coming?
It is not yet known whether the US economy will enter a recession due to the Federal Reserve's aggressive rate-hiking cycle.
Indicators are producing conflicting signals about the strength of the economy. For example, him The United States recorded GDP growth of 4.9% year-over-year in the third quarter, a historically high figure in pre-COVID terms and significantly ahead of the second quarter's 2.1% growth.
However, on Friday, the Bureau of Labor Statistics reported that the The United States added only 150,000 jobs in October, which was lower than economists' expectations of 180,000. Figures for September and August were also revised downward by tens of thousands of jobs, and the unemployment rate rose from 3.8% to 3.9%, still historically low.
Widely followed recession indicators, such as the Treasury yield curve and the Conference Board's leading economic index, still point to an imminent slowdown. But if the U.S. labor market and consumer can continue to hold up as the Federal Reserve appears to be at the end of its hiking cycle, the central bank could meet its goal of a soft landing.
In August, 40% of economists believed a recession would occur in the next 12 months, according to a reuters poll. That figure dropped from 65% in October 2022.
As for stocks, their performance depends largely on how the economy holds up in the coming months and where interest rates go. A significant decline in earnings performance or a deterioration in the labor market could spell trouble.
Still, the stock could have had limited upside for the rest of the year, as the S&P 500 is already up 14% so far this year.
