Hear from investment professionals Evan Brown and Enrique Davila in this month's Macro Monthly Podcast. They discuss the recent stock market correction, concerns of tightening financial conditions, rising bond yields, and geopolitical shocks. They also talk about the current state of the economy, signs of cooling and lowering guidance from corporations, and the impact of housing market activity and student loan repayments on growth. They expect a year-end rally after a moderation that stabilizes yields.
The recent stock market correction was driven by a strong economy and increased U.S. government bond yields, leading to reduced equity risk premiums and challenging valuations.
To recover, the market needs signs of economic cooling and a stabilization in yields, with a potential rally expected into year-end.
Deep dives
Stock Correction and Rising Yields
The recent 10% correction in stocks was driven by the economy being too strong, leading to an increase in U.S. government bond yields. Concerns about the Fed taking more actions to battle inflation further fueled the correction. The rise in yields negatively affects stocks by reducing equity risk premiums and challenging relative valuations. Additionally, the tightening of financial conditions due to higher yields can weigh on future growth. Other factors contributing to the correction include higher treasury issuance and geopolitical shocks like the terrorist attack in Israel and war in Gaza.
Regaining Market Footing
To regain its footing, the market needs some signs of cooling off in the economy and a stabilization or slight decline in yields. Negative sentiment and stressed positioning indicators in the market suggest that even a modest improvement could catalyze a significant rebound. The expectation is for a moderation in economic activity rather than a steep decline. Corporations have already started lowering their guidance for Q4 and the next year, citing signs of cooling in the economy that the data have not yet captured. The moderation is expected to allow yields to stabilize, leading to a rally into year-end.
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Analyzing the Recent Stock Market Correction and Potential Rebound
Hear from top investment professionals from the UBS Asset Management’s Multi-Asset Team, this month featuring Evan Brown, Portfolio Manager and Head of Multi-Asset Strategy, and Enrique Davila, Multi-Asset Investment Specialist.
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