By William Watts, MarketWatch
Yields still not attractive enough to justify underweighting
equities: UBS
Farewell, TINA?
TINA is the acronym for "there is no alternative," a market
mantra that reflected the frustration of investors who saw no
alternative to stocks in a post-financial crisis world dominated by
ultralow government bond yields as the Federal Reserve and other
global central banks embarked on asset-buying programs and other
forms of extraordinary stimulus.
A selloff in Treasurys has seen longer-dated yields rise quickly
in recent weeks, playing catch-up with a long-running rise in
shorter-dated yields. Yields and debt prices move in opposite
directions.
Indeed, the rise in the 10-year Treasury yield to a
more-than-seven-year high above 3.26% on Oct. 9 was blamed by some
investors for a subsequent U.S. stock-market selloff that turned
into a global rout. That selloff, in turn, sparked a flight to
traditional haven assets, like Treasurys, pulling yields back down.
But they began to creep back up, with the 10-year yield ending
Friday near 3.195%.
The question for investors is whether the yield on Treasurys and
other lower volatility alternatives is attractive enough to justify
shifting money out of stocks. For one money manager, the answer is,
not yet.
"While investors now have some fixed income alternatives to
equities, we do not consider them attractive enough yet to warrant
underweighting equities relative to fixed income. The backdrop for
equities remains sufficiently supportive, valuations are favorable
relative to historical norms, and upside risks at least partly
offset the downside risks we continue to monitor," said Mark
Haefele, chief investment officer at UBS Wealth Management, in a
note.
Also read:'Bonds are the bubble, not stocks,' says billionaire
investor Cooperman
(http://www.marketwatch.com/story/bonds-are-the-bubble-not-stocks-says-billionaire-cooperman-2018-10-17)
It comes down in part to the reason that yields are rising. In
the view of Haefele and stock market bulls, it's because the U.S.
economy remains robust rather than because investors fear a surge
in inflation that would hurt stocks.
Haefele sees no evidence so far that the Federal Reserve's rate
increases are unduly tightening financial conditions despite
President Donald Trump's criticism of policy makers as "crazy,"
"loco," and running "wild."
Counterpoint:Here's why stock-market investors suddenly freaked
out over rising bond yields
(http://www.marketwatch.com/story/stock-market-investors-are-right-to-be-frightened-by-rising-bond-yields-economist-2018-10-12)
Also, while 10-year yields have been on the rise, "this has been
more than offset by rising earnings, and the equity risk premium, a
measure of equity valuations relative to bond valuations, still
exceeds its historical average," he said.
Haefele said he's maintaining a "modest" overweight position in
global equities. While equity performance has been dominated by the
U.S. so far in 2018, "risks are present around the world" and
"diversification is the best approach to control portfolio
volatility." U.S. equities are no longer immune to selloffs, he
said.
Relative to cash, however, UBS is overweighting U.S. Treasurys.
Haefele said argued that investors have largely priced in the full
rate-hiking cycle, which UBS expects to peak with a fed-funds rate
of 3.25% to 3.5% in late 2020, meaning the 10-year yield is
unlikely to rise significantly -- and that Treasury prices
shouldn't fall much further either. He's also overweight
dollar-denominated, emerging-market sovereign bonds, arguing that
the 6.5% yield on a popular index is attractive, despite current
uncertainty surrounding emerging markets.
For U.S. equities, the past week was a mixed bag as earnings
season picked up steam, largely delivering positive results. Stocks
continued to see volatile trading but major indexes managed to
stabilize, with the exception of the Nasdaq Composite, which
continued to suffer as investors continued to dump once popular
tech shares.
The S&P 500 eked out a fractional gain for the week, while
the Dow Jones Industrial Average rose 0.4%, breaking a three-week
losing streak. The Nasdaq , meanwhile, fell 0.6% for its third
straight weekly decline.
On the earnings front, 17% of companies in the S&P 500 have
delivered third-quarter results so far. More companies are beating
estimates than average, but the magnitude of the beats is smaller
than average, said John Butters, senior earnings analyst at
FactSet.
Earnings next week include construction-equipment maker
Caterpillar Inc. (CAT) and McDonald's Corp. (MCD) on Tuesday,
Northrop Grumman Corp. (NOC) and Microsoft Corp. (MSFT) on
Wednesday, and Twitter Inc. (TWTR) and Chipotle Mexican Grill Inc.
(CMG) on Thursday. See:MarketWatch Earnings Calendar
(http://www.marketwatch.com/tools/earningscalendar)
(http://www.marketwatch.com/tools/earningscalendar)On the
economic front, data highlights include September new-home sales on
Wednesday, September durable goods orders on Thursday and
third-quarter gross domestic product on Friday. See:MarketWatch
Economic Calendar
(http://www.marketwatch.com/economy-politics/calendars/economic)
(END) Dow Jones Newswires
October 20, 2018 08:08 ET (12:08 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.