Investors reconsidering risk exposure in stock market

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Investors reconsidering risk exposure in stock market

Fears of tighter financial conditions leading to a recession are driving traders to reconsider their risk exposure and seek out safety in the stock market.

Charlie McElligot, cross-asset strategist at Nomura Securities International said it was not pretty out there. The bank profitability crisis will act as a catalyst for a tighter impulse in financial conditions. The reposition started about two weeks ago when the problems in the US banking system became clear with the collapse of Silicon Valley Bank. The shift might look and feel extra violent, not just because the financial sector is at the center of it all, but also because the stock market has rallied to start the year. That is now being unwound.

The risks have been there for a while and go beyond the problems in the financial system. Double-digit declines in the likes of Deutsche Bank AG or France's Societe Generale SA over the past month have reflected the impact on bank s earnings if lending activity shrinks and firms might have to ramp up their loan loss provisions.

On Friday, other growth-sensitive sectors tumbled with energy stocks falling as West Texas Intermediate crude fell below $70 per barrel gain. Commercial real estate shares slumped, and autos and miners were among the worst performers. Food, pharma and telecoms were perceived as more resilient to economic downturns, but investors did not sabotage it.

In a note Friday, Bank of America analysts said that this type of positioning is one of the reasons stock markets will test new lows in the next six months.

Money managers who have high levels of leverage and equity volatility are more likely to be avoiding companies with high levels of leverage and equity volatility, as evidence is found in factor models. They are ditching shares that screen highly for dividends and buybacks, a clear sign that investors expect companies to preserve cash going forward rather than blasting it out to shareholders.

The price of gold was trading above $2,000 as investors sought out safe harbors to weather any storm. Money market funds have attracted their largest inflow since March 2020 in the week through March 22, with more than $300 billion flowing into cash over the course of the past month, according to a Bank of America note that cites EPFR Global data.

Equity market volatility is not yet close to the levels seen last week, with the Cboe VIX Index trading at 23. According to McElligot, implied volatility for US equity indexes and ETFs remains relatively tense, while the so-called VVIX Index, which measures volatility of volatility, shows demand for tail risk hedging.

Marko Kolanovic, chief global markets strategist at JPMorgan Chase Co., said on Wednesday that for lack of better words, our outlook is negative. As for positioning, Kolanovic recommends investors to go more towards cash and short-term bonds where they get paid to wait for the situation to clear up. None of the ChatGPT Advances Are Moving So Fast Regulators Can't Keep Up With It.