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Stocks might not get trampled by central bank

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Stocks aren’t looking as shabby as UBS’s chief investment officer for wealth management once thought.

The thinking for much of this year was that a parade of global central bank “elephants,” armed with interest rate hikes and other measures to cool inflation, would deal a blow to the U.S. economy and weigh on stocks.

“In retrospect, the elephants did dance, and some victims were crushed,” Mark Haefele, chief investment officer of UBS Global Wealth Management, wrote in new client note. “It has also been a weak summer for major stock indexes. Yet overall, we overestimated the risks of central bank rate hikes for the global economy and were too pessimistic on stocks.”

The asset manager now has a 4,700 target for the S&P 500 index
SPX
through the end of June 2024, implying a total return of 7%-8% from recent levels. Here is its latest forecast, given different scenarios for the economy.

UBS sees room for stocks to gain through mid-2024, but still likes bonds at lot


UBS targets through end-June 2024

August has been rough for equities. U.S. stocks were on pace for weekly losses of more than 2.2% on Friday, but the S&P 500 was off about 4.9% for the month to date, trading below 4,370, at last check, according to FactSet. The Nasdaq Composite Index
COMP
was down 7.4% in August and the Dow Jones Industrial Average
DJIA
was 3.1% lower.

See: Will August stock-market stumble turn into a rout? Here’s what to watch, says Fundstrat’s Tom Lee

Haefele said a forecast for a shakier economic backdrop led UBS to take advantage of higher yields and “collect income from bonds,” earlier this year, but he now sees room for a “higher profile” of stocks in portfolios over the next six to 12 months, particularly with a “softish” landing for the economy looking possible, given inflation receding and the expanding U.S. economy, despite the Federal Reserve’s fast-tracking its policy rate to a 22-year high.

Still, the team also likes bonds and estimate total returns could hit 10% for investment-grade government and investment grade debt through mid-2024, with lower volatility, “supporting our continued relative preference for bonds over equities.”

The benchmark 10-year Treasury yield
BX:TMUBMUSD10Y
rose above 4.3% to its highest level since November 2007 earlier this week, but was pulling back to about 4.25% on Friday.

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