The world's biggest wealth manager says hopes for a vaccine may make the Fed 'slow to react' in injecting fresh cash





© Paul Hackett/Reuters
Mark Haefele, Global Chief Investment Officer of UBS Wealth Management attends the Reuters Investment Summit, London, Britain, November 16, 2017. Paul Hackett/Reuters

  • Mark Haefele, chief investment officer at UBS Global Wealth Management, told Business Insider the worst of the recent weakness in the stock market is probably over for now.
  • But he said the central bank may wait for a vaccine to inject fresh cash: “Is the Federal Reserve reluctant to deploy further stimulus here because they too are wondering ‘when are we going to get vaccine news’?”. 
  • His base S&P 500 target is 3,700 by mid-June 2021.
  • Visit Business Insider’s homepage for more stories.

The bout of bearishness that has put the US stock market on course for its first monthly drop in six months has likely passed its worst point this year, unless the Federal Reserve is ‘slower to react’ in deploying stimulus based on its vaccine expectations, the world’s biggest asset manager said. 

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In interview with Business Insider, Mark Haefele, chief investment officer at UBS Global Wealth Management, said: “You can always get a 5- 10% sell off in the market, but we don’t think that that’s something that’s going to last.”

Stocks won’t have another major sell-off

“We think it’s going to be very difficult for there to be a significant sell off for several reasons,” he said. “What is a source of risk right now, is [whether] the Federal Reserve is reluctant to deploy further stimulus because they too are wondering ‘when are we going to get vaccine news’?”. 

“When might we get more fiscal stimulus,”? Haefele said.”If the markets do have a hiccup and the Fed is waiting for these other things it could be slightly lower to react between now and the end of the year.”

The S&P 500 is on track for a 5.3% decline this month, its first monthly loss since March, mainly because of  pressure from technology stocks, which had helped the index stage a recovery of around 50% since hitting coronavirus lows in in the spring.

The stock market has been underpinned by rock-bottom interest rates and trillions of dollars in central bank stimulus that have made access to cash cheaper than ever. 

Fed is speculating on a vaccine timeline

The Federal Reserve has indicated that, while it has no plans to inject any fresh stimulus into the financial system at this point, interest rates will stay near zero until at least 2023. 

Republicans and Democrats have been in a stalemate for weeks over providing further government support since July when a $2.2 trillion rescue package that had been in place in March expired. The two are largely at loggerheads on the size of any new bill on financial aid.

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Haefele’s base case for the S&P 500 is 3,700 by next June, roughly 10% above where the index is currently trading, although he said any rally could eventually move above here if a vaccine is available sooner. 

Republican president Donald Trump, who is bidding for re-election in November, has said he is optimistic the US will manufacture 100 million coronavirus vaccine doses for every American by April, but market watchers have taken the claim with a pinch of salt. 

Negative rates could reverberate across all assets

A delay to an effective vaccine isn’t the only hurdle the stock market might face. Negative interest rates, which a number of central banks have already deployed to ward off further damage to their economies, could pose a challenge.

Haefele said while negative interest rates are a very low probability in the US, they cannot be completely ruled especially if the Fed isn’t able to inject more cash. 

“The biggest question is if we have more countries move towards negative interest rates, because that could reverberate across all asset classes,” he said. 

The Bank of England said Tuesday it doesn’t plan to cut interest rates below zero, but market watchers were taken off guard when the central bank brought them back into consideration last week. 

Haefele said the Fed is likely to “front-load” whatever stimulus it provides to prevent rates from turning negative.

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“Money market funds are designed to not necessarily work very well in a negative rates environment,” Haefele said. “If it looked like the curve was going to go negative in the United States, that might be a cause for volatility,” he concluded. 

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