A top investor expects volatility to dominate Wall Street for months.
Amanda Agati, chief investment officer of PNC Financial, cites exaggerated market valuations, the Federal Reserve’s taper chatter and the end of economic controls as troubling forces in the market.
“You have to choose your exposures very, very carefully,” Agati told CNBC’s Trading Nation on Thursday. “This is not a scenario where we believe a rising tide will lift all boats – especially not at such high valuation levels for both stocks and fixed income.”
Much of their forecast includes “unusual” volatility dynamics that currently affect both stocks and bonds.
According to Agati, the CBOE Volatility Index (VIX), which is considered the fear meter of the market and reflects future volatility over a monthly period, is back at its historical average. However, she notes that all contracts are still higher than they were in January 2020, before the pandemic hit the United States.
Meanwhile, Agati notes that the bond market’s equivalent to the VIX, the Merrill Lynch MOVE Index, is at its spring 2020 highs.
Agati warns that the two trends mean larger price fluctuations.
“We’re likely to see more price volatility than normal,” said Agati, who manages $ 175 billion in assets.
She sees the policies of the Federal Reserve as the greatest overall risk to the markets.
“I don’t really think inflation is the main way forward risk for the markets,” said Agati. “We actually believe that this is that five letter word that we have been hearing from some Fed governors lately and that is ‘Taper’.
A warning to Reddit merchants
Agati expects the highly speculative businesses fueled by the Reddit rebellion, including those of AMC Entertainment and GameStop, to dissolve by the end of summer when the economic controls are suspended.
“It’s a friendly reminder that a lot of policy adjustments and incentives have really propped markets through the pandemic,” said Agati. “We have a fiscal cliff in September, so I think this will change the game for small-cap value exposure quite significantly at this point.”
For the most reliable profits, she advises investors to go overseas. Agati finds emerging markets attractive. She continues to be the owner and helps make the area known.
“It’s a nice hedge against an inflationary backdrop,” she said. “If you look at the longer-term growth outlook, it is the brightest star in the equity asset class universe and is definitely growing – from an economic and earnings perspective – from a much higher base compared to the rest of the developed world. “
Agati’s volatility forecast may not include an official market correction warning, but it is something that clearly worries her.
“If you look at historical analysis and data, a major correction is long overdue, and the last time we saw it on the S&P 500 was last September,” said Agati.
At Thursday’s closing, the S&P 500 and Dow are 1% and 1.5% from their all-time highs, respectively. Tech-heavy Nasdaq is down 4% from its record high.
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