Investors Turn to Gold and Tech Stocks Amid Recession Risks
The risk of the US economy plunging into recession has dominated many discussions on Wall Street. Unlike in the past, when investors ran away from equities on deteriorating economic conditions, many have been putting their money to work. Likewise, strategists at JPMorgan have taken note, affirming how investors are favoring gold and technology stocks amid the recession fears.
Long Duration Bets
“Long duration” is the new investment strategy whereby investors are investing more in gold, growth stocks like tech plays, and some currencies amid the recession risk. Such trades are becoming more attractive as they provide limited downside potential in case of a mild US recession. But in addition, they seem to provide plenty of upside potential in case of a deeper recession.
The sentiments echoed by JPMorgan strategists are well supported by institutional investors flocking into gold, often seen as a safe haven in case of uncertainties. Consequently, the precious metal is already up by more than 9%, outperforming the S&P 500, which is up by about 6% year to date.
Gold has continued to outperform owing to dollar weakness across the board. The dollar has been under pressure in recent months on suggestions the US Federal Reserve has reached the end of its aggressive monetary policy tightening. With the FED expected to cut interest rates at the end of the year, the dollar remains susceptible to further weakness, which should see gold benefit.
On the other hand, investors have been betting on high-growth stocks like technology companies, most of them delivering impressive earnings. Better-than-expected earnings reports have once again reaffirmed that the companies are well-positioned to stay afloat even on economic conditions deteriorating.
Tech-heavy Nasdaq Index has been one of the best-performing thanks to the growing investments in tech stocks. The index is already up by more than 20% for the year. The rally affirms how investors have become more overweight tech plays while shunning high valuation levels. Given that tech has the lowest short interest, it underscores the increase in net long exposures.
Rising Yields
In addition, technology companies have been attracting investment dollars on growing confidence that the FED will not hike interest rates beyond the 5.25% level. A lower interest rate environment always works for tech companies as they can access cheap capital that they can use to fund research and development activities to stay competitive in the industry.
In addition to tech stocks, investors are also betting big on credit, given the high yields on offer. Corporate bonds with a higher duration of 7-8 years are attracting the most bids given the high yields they offer, perfect for shrugging the current high inflation environment.
Meanwhile, treasury yields edged higher after employment data in the US averted expectations that the FED would reverse from its interest rate increase plan. As a result, the two-year note was up 13 basis points to 3.92%, and the ten-year note rose 6 basis points to 3.44%.
The Non-Farm payroll report showed that the US economy added 253,000 jobs in April against the 179,000 expected. The unemployment rate also fell to 3.4%. A tighter labor market indicates the aggressive interest rate hikes have done little to harm the economy.
