The Dow Jones is up by more than 300 points on the day but fund managers are still defensive and the bond markets are strong, which may pave the way for a larger rally.
As the U.S. and China reached a partial trade deal on Oct. 11, significant pressure was alleviated from the U.S. stock market, reflecting on the 1.21% upsurge of the Dow Jones.
Why fund managers are cautious despite Dow Jones optimism
Matt Daly, head of corporate and municipal bonds at Conning, said in an interview with the FT that the firm’s accounts are moving more to a defensive position.
“In our accounts, we are moving to an incrementally more defensive position. We are definitely more towards the end of the cycle,” he said.
Wells Fargo Investment Institute head of global market strategy Paul Christopher similarly said that even upon the agreeance of a partial deal, there are uncertainties such as the slowing growth of the manufacturing sector that presents a potential roadblock for the Dow Jones.
Earlier this week, CCN also reported that the Midwest jobs market has been on a steep decline as a result of the sluggish growth of factories in states like Michigan.
As such, Christopher emphasized that Wells Fargo is becoming increasingly cautious and removing risks appropriately.
“You have a slowdown in manufacturing that is turning into a more noticeable contraction around the world,” noted Christopher, adding “the warning signs are growing. We are increasingly cautious and removing risk where we think it is appropriate.”
With major investment firms and financial institutions on the defensive side, the mini-rally of the Dow Jones triggered by a partial deal likely does not reflect the expected inflow of capital from funds to the equities market.
Interest rate likely to keep going lower
On Thursday, Minneapolis Fed President Neel Kashkari said that his stance towards the nation’s benchmark interest rate is to maintain it low enough to support the expansion of the economy.
Emphasizing that if data shows the U.S. economy is contracting in the upcoming months, Kashkari said that he will support another cut in the interest rate in the short term.
“My base-case scenario is still growth, I’m not forecasting recession, but the risks to the downside are increasing. I think monetary policy is currently around neutral to potentially slightly contractionary. I think don’t think we should be in a contractionary stance. If the data continues to come in the way it has, I’m going to be supportive of another rate cut. How much more we need to go I don’t know.”
Joyce Chang, chair of global research at JPMorgan, sharing the sentiment of Kashkari, noted that a partial trade deal with China is not likely to affect the Fed’s accommodative stance, which could indicate that the partial deal is not fully priced into the market just yet.
“I think that progress on it [trade talks] is something where it is not going to be comprehensive so I don’t think that alone does it. We really have to continue looking at the numbers. We really think there is downside risk to the 1.5% to the 3rd quarter GDP number in the U.S. Now it’s not a recession but we think there is still more pain ahead,” explained Chang.
As the Fed continues to evaluate more data from different aspects of the U.S. economy, regardless of the partial deal and the growing progress for a larger deal with China, an accommodative stance will benefit the short to medium term trend of the Dow Jones.
Disclaimer: The above should not be considered trading advice from CCN.
This article was edited by Gerelyn Terzo.