The threat of high inflation, rising interest rates and faltering growth could become a “potentially toxic mix” for equities, prompting Erik Knutzen, chief investment officer of Neuberger Berman’s multi-asset class portfolios, to take a new underweight stance on equities .
With the S&P 500 index SPX up 0.71%, up more than 6% since Russia invaded Ukraine, Knutzen sees caution in equities over the next 12 months and thinks investors will ‘buy the dip’ mentality” should be forgotten in the last two years and stock market rallies are beginning to “fade”.
“Higher inflation generally requires higher interest rates and tighter monetary policy from central banks,” Knutzen wrote in a note to clients on Sunday.
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While the outbreak of war has historically tended to cause temporary pressure on equities, Neuberger Berman’s Chief Investment Office has argued for some time that this conflict could play out differently, largely due to Russia’s and Ukraine’s significant influence over global oil BRN00, -2 .33% CL.1, -9.02%, Energy and grain markets.
The “Ukraine crisis directly exacerbates the fundamental challenges investors were already facing: high and problematic inflation amid slowing economic growth,” he wrote.
In addition, a number of Federal Reserve officials have spoken about possible rate hikes this year to curb inflation more quickly. Cleveland Fed President Loretta Mester said last week that interest rates should rise to about 2.5% this year.
“Higher interest rates mean lower valuation multiples, while lower growth and rising costs eat into many companies’ revenue and profits,” Knutzen wrote, adding that such an environment could be particularly difficult for growth stocks.
However, if the central bank sees “any signs of success” in terms of a slowdown in inflation with negligible losses in jobs or industrial activity, Knutzen said his team will reconsider its decision to downgrade equities as part of its 12-month outlook.
Stocks were mixed on Monday, with the Dow Jones Industrial Average DJIA, up 0.27%, up about 0.4% and the Nasdaq Composite Index COMP, up 1.31%, down 0.5% during the 10-year Treasury rate TMUBMUSD10Y, up 2.466%, slightly lower by 2.47%.
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