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There’s a risk that stocks will go downhill from here, according to Wells Fargo’s Paul Christopher, as he warned investors not to chase the current rally. Paul Christopher, head of global market strategy at the Wells Fargo Investment Institute, says he’s not convinced that the U.S. Federal Reserve will cut rates, or even hold. “Markets have been trying to convince themselves that rates were going to come down, that the Fed and central banks around the world would not hike by as much as they have,” he told CNBC’s “Squawk Box Asia” on Thursday. “Even if the Fed stays on hold next week, we don’t think the Fed stays on hold for very long — inflation is just too sticky.” Christopher added that he does not believe the Fed will cut rates this year. The central bank is next due to meet on June 13 and 14. The strategist also highlighted a number of ongoing problems in the economy: distress borrowing is on the rise, inventory levels are still too high in some segments, and the earnings stumble is not fully priced into the majority of cyclically oriented sectors. He added that tighter credit conditions after the banking crisis is also adding to a slowdown in lending activity. “There is likely more downside risk in stocks at this point (a.k.a. Don’t chase this equity rally),” he wrote in notes sent to CNBC. “Markets are too complacent in our opinion.” History shows the S & P 500 doesn’t bottom until, on average, six months after the first Fed rate cut, Christopher said. U.S. indexes have rallied this year, with the S & P 500 hitting a new high for 2023 on Thursday. It is up nearly 13% so far this year, while the tech-heavy Nasdaq has soared 27%. The rally has been a narrow-focused one, however, with gains driven by just a few major tech stocks. Christopher noted “a real strong bid” going into artificial intelligence and tech-related stocks, but said it will be bad news for such stocks when the Fed continues to raise rates. “So what happens when we get another rate hike? … What happens when the Treasury starts to remove liquidity? By issuing lots and lots of new treasury bills to replenish their coffers,” he told CNBC. “Interest rates rising, especially on the long end, plus the liquidity leaving the market and that’s going to leave a lot less speculative energy for the very few stocks that appear in this realm.” Lower rates tend to be good for growth stocks such as tech, as they rely on borrowing a lot of money to fuel their future growth, and are viewed as longer-duration assets. The higher rates go, the lower the present value of their future stream of earnings. “It’s those tech stocks or big names that really have enjoyed lower rates, want the long end and all of this liquidity, and we think that’s coming to an end,” said Christopher. How to position As such, Christopher says investors should remain defensive in stocks and fixed income. He urged them to take profits in tech and reinvest in sectors such as healthcare and energy. “Recently, we took further defensive steps, specifically to reduce overall portfolio risk by reallocating some capital out of U.S. equities into [short term] fixed income and [developed market] equities,” he said.
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