INVESTORS PREPARING FOR ROCKIER RIDE AFTER CHOPPY WEEK

All three main stock indexes in the US rallied to end sharply higher a choppy week, led by a rebound in tech shares like Microsoft, Cisco and Salesforce. The Dow Jones gained 226 points, or 0.7% to 35,120; the S&P 500 added 0.8% to 4,442 and the tech-heavy Nasdaq Composite rose 1.2% to 14,715. On the week however, all posted weekly losses.Whereas, European shares lost 1.5% in the third week of August, the most since February .Autos remained under pressure amid expectations of further production cuts due to a semiconductor supply bottleneck, while retailers gained after Marks & Spencer lifted its profit outlook. In other corporate news, British supermarket Morrisons agreed on a takeover offer worth £7.0 billion from US private equity group Clayton, Dubilier & Rice. Considering only Friday, the pan-European Stoxx 600 went up 0.3%, partially recovering from a 1.5% slump in the prior session which was the worst in a month. Domestically, the DAX 30 closed 0.2% higher on Friday but fell 1.1% on the week.

Investors apparently are preparing for a rockier ride ahead for markets, as worries over slowing growth, a looming rollback of the Federal Reserve’s easy money policies and a global COVID-19 resurgence threaten a rally that has seen the S&P 500 double from last year’s lows. Signs of caution abound, even as U.S. stocks hover near record highs. Goldman Sachs economists recently lowered their tracking estimate of U.S. economic growth in the third quarter to 5.5% from 9% due to the impact of the Delta variant, while fund managers surveyed by BofA Global Research said they boosted cash overweights to the highest level since October 2020 while adding to positions in defensive sectors such as healthcare and utilities.

Worries over slowing growth in China and other major economies have hit prices for oil, copper and other raw materials while the U.S. dollar, a key destination for nervous investors, stands at its highest level in nearly nine months against a basket of currencies. Even retail investors, a group that has supported rallies in everything from tech stocks to crypto over the past year, appear to be cooling their heels.

Past warnings of a coming pullback have so far failed to play out this year, and cutting exposure to stocks has been a losing strategy during the market’s run from its 2020 lows, reinforcing the idea that there are few assets where investors have been able to notch the type of returns seen in equities. Still, the looming risks have bolstered the view that markets may be more turbulent in the months ahead.

Among investors’ key worries is the risk that the Fed, faced with stronger-than-expected inflation, begins pulling back on its support for the economy just as growth starts ebbing and the coronavirus’ Delta variant threatens to rollback reopening across the country.

Investors will be watching next week’s central bank symposium in Jackson Hole, Wyoming for clues on when the Fed will begin slowing its $120 billion purchases of U.S. government bonds. BofA Global Research analysts earlier this week moved up their timeline for the start of the Fed’s taper to November, from a previous forecast of January, believing that minutes from the central bank’s most recent policy meeting, released Wednesday, signaled a greater likelihood of an unwind beginning this year.

Rich valuations are also giving investors pause. The S&P 500's P/E ratio on a forward 12-month basis stands at 21.1, a more than 34% premium to its 20-year average. Despite all these worries, many investors are employing strategies that will allow them to stick with stocks, which have benefited from ultra-low Treasury yields and standout growth in the U.S.