Wealth manager says: Prepare for wild swings in US stocks amid rising uncertainty over interest rates
US stocks had their best week in a year, but don’t expect this upbeat trend to continue.
David Donabedian, of CIBC Private Wealth, said the market could face sharp volatility until the end of the year due to uncertainty over interest rates.
“Although last week was good for the stock market, it won’t always be that easy,” he said.
US stocks had their best week in a year. But don’t take that to mean a smooth ride ahead, according to one expert.
Continued uncertainty about the future direction of interest rates will lead to increased volatility in stocks in the coming months, according to David Donabedian, chief investment officer at US bank CIBC Private Wealth, which oversees more than $100 billion in assets.
The Standard & Poor’s 500 index of US stocks jumped 5.85% last week, after the Federal Reserve left interest rates unchanged for the second meeting in a row. Weaker-than-expected jobs data also fueled expectations that the central bank will refrain from increasing borrowing costs as the economy begins to slow.
Improving sentiment in stocks sent the market’s so-called fear gauge, the CBOE Volatility Index, or VIX, falling by the most since 2021 last week.
But the drop in the uncertainty measure may be temporary, Donabedian predicts.
“While last week was good for the stock market, it won’t always be this easy,” he said in an email. “We expect the rest of the year to be volatile, with crazy depressing swings depending on which way interest rates go.” comments.
He added that the main reason for such fluctuations is unresolved uncertainty about interest rates. Although it has not raised borrowing costs since July, the central bank is still sticking to its position that interest rates will remain higher for longer, given the persistent inflation threat.
“Looking ahead, there may be a reality check on the Fed,” Donabedian said. “If bond yields continue to fall, will interest rate hikes come back to the table? We need to keep an eye on this.”
US stocks have received signals in recent months from the Treasury market, with benchmark yields hitting 16-year highs above 5% in late October. Higher yields on government bonds, which are considered a safer form of investment, tend to lure investors away from riskier assets such as stocks.
The Fed has raised its benchmark interest rate by more than 500 basis points since early 2022.
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