Investing Pros Paint a Grim Picture for the Economy and Markets
Investing pros are using animal analogies to describe the state of the financial world and it’s not looking good.
The US economy might be set up for a Looney Tunes style plummet as the gravity of the Iran war sets in, according to UBS’ chief global economist Paul Donovan.
Meanwhile, Piper Sandler’s chief market technician Craig Johnson described the current stock market as “trying to outrun a bear” with investors ignoring mounting risks.
“Running across thin air”
The “Wile E Coyote effect” is in full swing for developed economies like the US and the UK, UBS’ chief economist warned.
“In the Roadrunner cartoons, Wile E Coyote would run off the edge of the cliff, continue running across thin air, and only later realize the absence of solid ground before plunging into the abyss below,” Donovan said. “Developed economies, consumers are still happily running across thin air.”
Consumers are still spending as the gravity of high oil prices hasn’t yet set in the economist explained. Higher oil prices driven why the conflict in the Middle East are eroding spending power. He said this disconnect will eventually come crashing down.
Consumer spending has held up despite sentiment tumbling to record lows as Iran war drags on. Bank of America reported that total spending rose at the strongest rate since early 2023. Some of this spending growth was a result of higher gas prices, though spending excluding gas also jumped.
This spending was driven by higher-income consumers, as expected in the ongoing K-shaped economy, with lower-income groups see gas prices eat away at a larger portion of their household budget.
UBS’ Donavan outlined that the recent strength in spending suggests that consumers are cutting savings rate to maintain their living standards while oil prices are high
“This cannot carry on forever, but economic gravity has yet to exert itself,” he wrote.
Stocks are ‘trying to outrun a bear’
It’s not just the economy that could see the delayed realization of the gravity of the Iran war effects.
Piper Sandler’s chief market technician Craig Johnson is bullish on US equities in the long term, but he told Business Insider that it feels like “trying to outrun a bear” in the near term.
The stock market has hit record highs during the war, with investors looking through the impacts of the oil shock on the global economy despite warnings about inflation and other impacts.
Johnson described the current market dynamics saying, “Markets are going up, [but] you know that this bear is kind of coming for you.”
He said that “bear” could be the economic impact of the conflict in the Middle East, further disruptions in the Strait of Hormuz, or an escalation in the war in Iran, among other things.
“People are overlooking these higher oil prices because they don’t know how to trade a geopolitical situation,” the strategist said, adding, “They don’t know how to trade it. They don’t know how to put risk to it… So, we’ll just ignore it.”
Investor sentiment is more bullish two months into the war than it was at the start. AAII data showed that nearly half of investors are bullish in mid April, compared to roughly a third in the reading ahead of the start of the Iran war.
