The equities markets, which have fallen 12% since May's highs, may have just gone through a sell-off that meets the classic definition of a correction, but UBS Wealth Management Research is cautioning that it still might not be a great idea for investors to jump back into the market just yet.
And that's after stocks of all types were pounded in Monday trading, sending the Dow Jones Industrial average down more than 600 points, or 6%, in the first trading day since rating agency Standard and Poor's stripped the country of its vaunted AAA debt rating. The Nasdaq and S&P 500 were similarly hammered, shedding 7%, respectively.
“It is premature to assume that the most recent sell-off represents an unqualified opportunity to increase exposure to risk assets,” said UBS Chief Investment Strategist Mike Ryan in an analysis of the market.
Ryan, in an interview with On Wall Street, conceded that equities are cheap by historic standards, in terms of their earnings multiples, and that they are cheaper compared to bonds than they were “any time during 2010.”
But he then asked, “Does valuation still matter?”
The problem, as Ryan sees it, is that other factors have taken over in determining investor attitudes towards equities. “Markets now are focused on recession risk, on the downgrade of US debt, and on sovereign risk issues in the EuroZone,” he said, adding that “there is also a feed-back loop among these three factors.”
Given the importance of these factors, it may not matter that valuations are increasingly low.
Ryan says he does not expect any quick bounce in markets. The risk factors in equities have grown over some time, he notes, and says it will take time to rebuild business, investor and consumer confidence.
“The burden of proof right now is on the economy to show that it is not moving back into recession,” he said, noting that the probability of recession has become “significantly higher” than it was three weeks ago “because of the equities sell-off.”
As he explained, “These things feed into each other. The repricing of equities that has just taken place will clearly impact business and consumer sentiment.”
Asked whether investors are in for a long period of uncertainty, given that the task of addressing the U.S. budget deficit has been handed off to a group of 12 hand-picked members of Congress from the two parties, and that they aren’t expected to come up with a proposal for another $1.5 trillion in cuts until nearly Thanksgiving, Ryan said, “Don’t assume the government won’t act. If the leaders sit down with the White House and decide on action, they can act. I’m not saying that will be done, but they could act.”
He added hopefully, “Nothing focuses the mind in Washington like either an election or a crisis.”