Third Quarter Outlook:
(UBS) July Navigating a Tight Spot
UBS, in its Quarterly Market Outlook for the third quarter summarizes the challenges ahead. Gauging the Market Impact at the End of the Tightening Cycle: "The future course of monetary policy will require greater discretion as the tightening cycle draws to a close. Precisely how the terminal phase of this tightening cycle plays out is likely to have a material impact on equity and fixed income return prospects in the second half of this year. Past Not Prologue: "The end of the tightening cycle has historically been greeted with enthusiasm by the bond market but largely with ambivalence by the equity market. However, several critical aspects of this cycle differ materially from prior periods of Fed tightening. Thus, we believe financial markets may react differently this time around. Equities: Modest Upside: "Although performance has varied, it is instructive to note that the ends of the four prior tightening cycles have not been systematically negative for equity market returns. We estimate a year-end fair value range for the S&P 500 of 1230-1280, about 1-5% above current levels. Fixed Income: No End-of-Cycle Rally in Sight: "We believe increasing inflation pressures and solid economic growth will force bond yields higher in the intermediate and long end of the maturity spectrum in the months ahead. We recommend: underweight duration; a modest overweight exposure to municipals and mortgages; and a neutral curve allocation."
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