Money managers at firms overseeing more than $8 trillion said investor concern that the U.S. economy will slow as Obama and Congress fail to avert $607 billion in tax increases and spending cuts next year are overblown. U.S. stocks had the biggest weekly decline since June while yields on Treasuries fell to two-month lows and gold advanced the most since September.
From jobs to housing, and from consumer confidence to international trade, U.S. data show the world’s largest economy is strengthening. In China, the second-largest, exports rose about 10 percent in both October and September from a year before, up from gains of less than 3 percent the prior two months. Companies worldwide from the most creditworthy to the neediest are borrowing in capital markets at the second-fastest pace on record and at the cheapest rates ever.
“It’s astonishing that now the market is turning so quickly and we don’t understand that,” said Bettina Mueller, a money manager in Frankfurt at Deutsche Bank AG’s DWS Investments unit, which oversees about $350 billion. “Our expectation regarding the fiscal cliff is that both sides will come to a compromise.”
The carnage was widespread. The MSCI All-Country World Index of stocks fell 2.55 percent in the three days after the Nov. 6 vote. In the U.S., the Standard & Poor’s 500 Index slid 3.4 percent.
Investors retreating from riskier assets pushed the yield on the benchmark 10-year Treasury to 1.61 percent from 1.75 percent. The Dollar Index, which measures the greenback against six major trading partners, jumped to a two-month high. Gold futures for December delivery reached $1,730.90 an ounce.
Money managers with the most at stake said they are increasing holdings of securities that benefit from expanding economies instead of preparing for another U.S.-led recession.
“What the American people are looking for is cooperation,” Obama said at the White House on Nov. 9 in his first public remarks on the budget and deficit since winning re- election Nov. 6. “They’re looking for consensus. They’re looking for common sense. Most of all, they want action.”
Pacific Investment Management Co., which manages $1.92 trillion including the world’s largest bond fund, sees as much as a 70 percent chance that U.S. lawmakers will compromise to avoid the spending cuts and tax increases.
“No one in their right mind would push our country into recession,” Mohamed El-Erian, the chief executive officer of Newport Beach, California-based Pimco, said Nov. 9 in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “The major issue for us is not that we resolve the fiscal cliff but do we do it in a way that allows Washington to pivot to turning headwinds into tailwinds.”
The biggest holdings in Pimco’s flagship fund, the $281 billion Total Return Fund, are mortgage and related securities, which make up 47 percent of assets, according to a Nov. 9 report on the firm’s website.
BlackRock Inc., world’s biggest asset manager with about $3.55 trillion, favors corporate bonds and dividend-paying stocks, according to Jeffrey Rosenberg, the New York-based firm’s chief investment strategist for fixed income.
“If we get through” the fiscal cliff “and we see the clarity that there won’t be the very extreme downside for markets, then we have a very good outlook following that,” Rosenberg said at Bloomberg’s Portfolio Manager Mash-Up conference in New York on Nov. 8. “We’re still in this environment of persistent low interest rates.”
DWS cut its holdings of Treasuries to “underweight” from “neutral” after the election on speculation the rally was “overdone,” Mueller said. Treasury 10-year yields will likely rise to 2.32 percent by the end of next year, according to the median estimate of more than 80 economists and strategist surveyed by Bloomberg News.
The dollar was little changed at $1.2709 per euro as of 4:37 p.m. in New York. The Standard & Poor’s 500 Index was unchanged. U.S. bond markets are closed for Veterans’ Day.
Axa Investment Managers, which oversees the equivalent of $382 billion from London, favors lower-rated investment-grade and speculative-grade corporate bonds.
“We’re in for a period of volatility but in the end some agreement will be reached because reaching one is good politics,” Chris Iggo, Axa’s chief investment officer for fixed-income, said in a Nov. 9 interview.