Market participants grappled with risks of persistently high inflation and a bleak economic outlook, which strategists say fueled a heady mix of confusion and pessimism.
It comes as investors monitor a fresh batch of US economic data that will provide further clues about the cooling of inflation and whether the Federal Reserve could announce another interest rate hike at its next meeting in early May. Is.
Bob Parker, senior advisor at the International Capital Markets Association, said investor confusion is emerging as a major theme in the financial markets.
“If you look at surveys of investor positions and investor sentiment, there’s an enormous amount of confusion at the moment,” Parker told CNBC’s “Squawk Box Europe” on Wednesday.
“Is inflation coming down fast or not? To what extent is the US economy and, for that matter, the European economy slowing down? And what are the recession risks?” Parker said.
“And so, given those uncertainties, I think investors are risk-averse at the moment and booking, frankly, what are nice year-over-year profits.”
Parker said many investors were taking profits on the “nice returns” seen year-to-date in both the US and Europe, because “clearly, first quarter earnings are going to be very negative.”
Traders work on the floor of the New York Stock Exchange on April 21, 2023 in New York City.
Spencer Platt | Getty Images News | Getty Images
Looking ahead, Parker said the theme for May and June is likely to be rotation in year-over-year underperforming stocks, “that are in value and defensive sectors and taking profits on cyclical and growth sectors.”
Value stocks are those that are thought to be trading below their true value, while defensive stocks typically provide steady income regardless of the state of the stock market.
Seen as the opposite of defensive stocks, cyclical stocks generally follow economic cycles. Growth stocks refer to firms that are expected to outperform the overall market.
‘Oil is overcoming pessimism’
Fears about an impending recession appear to be growing, with many economists predicting a period of contraction in 2023.
Earlier this month, the International Monetary Fund published its weakest medium-term global growth expectations for more than 30 years.
The Washington, DC-based institution said global growth is likely to hover around 3%, meaning the global economy is not on track to return in the medium term to rates prevailing before the start of the coronavirus pandemic.
The IMF’s first deputy managing director, Gita Gopinath, has since said that while risks of a so-called “hard landing” remain, the US economy may avoid recession.
Asked whether the drop in oil prices can be interpreted as a gloomy economic barometer, Giles Keating, director of Bitcoin Suisse, told CNBC’s “Squawk Box Europe” on Thursday, “I think the world There’s a general pessimism now about where the economy is going.
“I don’t think things are that bad. There’s a lot of concern now about a problem with one bank – and it’s not the same as a problem in the banking sector, so I think oil is going to offset the pessimism here,” he said. doing.”
His comments marked another sharp drop in First Republic’s stock. The beleaguered San Francisco-based lender was seen as a riskier bank by investors following last month’s collapse of Silicon Valley Bank, which had a similar financial profile.
— CNBC’s Alex Harring, Haking Kim and Jesse Pound contributed to this report.