Alex Wolf, Vice-President of JP Morgan Private Bank remains positive on U.S. stocks and some aspects of the stock market despite sluggish growth in the global economy.
On Squawk Box, Wolf stated that the current trend of the U.S. stock market and stocks are similar to that of 2015 to 2016 during a period in which the manufacturing sector experienced a small recession.
At the time, U.S. stocks performed relatively well compared with the global stock market and the strategist emphasized that the struggle of the manufacturing sector is not enough to determine that stocks will have difficulty in sustaining its upward momentum.
The Federal Reserve is also expected to target additional cuts in the benchmark interest rate going into 2020 that may increase the confidence of investors towards stocks.
Wolf said :
“[What we’re seeing now] is somewhat similar to what we saw in 2015/16 when we had somewhat of a mini manufacturing recession. But at that time, U.S. equities still did relatively okay, still outperforming the rest of the world so we’re still liking U.S. equities.
Within U.S. equities, we like healthcare, we like certain aspects of communication services, and even now, we’re liking some cyclicals, I think relative to growth stocks. But that’s more of a short-term, fourth quarter strategy.”
The strategist further noted that while manufacturing is technically in a mini-recession, it is not solely caused by the rise of geopolitical risks from the U.S.-China trade war.
He said that the build-up of inventory across the global market gradually led to a decline in the growth rate of the manufacturing sector.
Over time, Wolf explained that the inventory will steadily move out, providing more breathing room to manufacturers, leading to an overall recovery.
“One of the other large reasons why we’re seeing such a downturn in global data, especially global manufacturing data, is relatively high inventory levels globally.
And again, similar to what we saw a few years ago, back then the inventory levels were mostly in commodities, now they’re mostly in goods and technology goods. I think as you see inventory levels come down as companies work those off, I think you’ll see in production, you’ll see resumption in manufacturing and growth numbers. But it will take some time to work off those inventory numbers.”
At the current juncture of the market, as long as the Federal Reserve maintains the benchmark interest rate at historic lows and the U.S.-China trade talks demonstrate progress, the sentiment around U.S. stocks and the stock market is expected to remain positive.
According to Michael Spencer of Deutsche Bank, the Federal Reserve may initiate three more cuts to the benchmark interest rate moving into 2020 based on the slowdown of the global economy and the encouragement of U.S. President Donald Trump to further cut the interest rate.
Additional cuts after having approved a new cut in the interest rate in September would create a practical environment for businesses to expand even if the U.S. and China fail to reach a partial deal in October as expected.