Market participants are contending with the risk of persistently higher inflation and a bleak economic outlook, which strategists say is stoking a heady mix of confusion and pessimism.
It comes as investors monitor a fresh batch of U.S. economic data that will provide further clues as to whether inflation is cooling, and whether the Federal Reserve is likely to announce another interest rate hike at its next meeting in early May.
Bob Parker, senior advisor at International Capital Markets Association, said investor confusion appeared to be emerging as a big theme in financial markets.
“If you look at the surveys of investor positioning and investor thinking, there is a huge amount of confusion at the moment,” Parker told CNBC’s “Squawk Box Europe” on Wednesday.
“Is inflation coming down rapidly or not? To what extent is the U.S. 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 reducing risk at the moment and booking, frankly, what are decent profits year-to-date.”
Parker said many investors were profit-taking on the “good returns” seen year-to-date in both the U.S. and Europe, as “clearly, the 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 that the theme for May and June was likely to be a rotation into underperforming stocks year-to-date, “which is into value and defensive sectors and taking profits on cyclical and growth sectors.”
Value stocks are those thought to be trading below their true value, while defensive stocks typically provide stable earnings regardless of the state of the stock market.
Cyclical stocks, seen as the opposite of defensive stocks, generally follow economic cycles. Growth stocks refer to firms that are expected to outperform the overall market.
‘Oil is overdoing the pessimism’
Fears about an upcoming recession appear to be growing, while many economists have predicted a period of contraction in 2023.
Earlier this month, the International Monetary Fund published its weakest global growth expectations over the medium term for more than 30 years.
The Washington, D.C.-based institution said that global growth was likely to be around 3%, meaning the global economy is not on track to return over the medium term to the rates that prevailed before the onset of the coronavirus pandemic.
Gita Gopinath, the IMF’s first deputy managing director, has since said that the risks of a so-called “hard landing” remain, even while the U.S. economy could avoid a recession.
Asked whether a downward trend in oil prices could be interpreted as a gloomy economic barometer, Giles Keating, director at Bitcoin Suisse, told CNBC’s “Squawk Box Europe” on Thursday, “I think there is a general pessimism now about where the world economy is going.”
He added, “I don’t think things are that bad. There is too much worry about a problem with one bank now — and that’s not the same as a problem across the banking sector so I think oil is overdoing the pessimism here.”
His comments referred to another sharp slide in First Republic‘s stock. The troubled San Francisco-based lender was seen by investors as a risky bank after last month’s collapse of Silicon Valley Bank, which had a similar financial profile.
— CNBC’s Alex Harring, Hakyung Kim & Jesse Pound contributed to this report.