Shares’ large rally from the bear market is extra like a useless cat bounce, UBS says. ‘We count on renewed volatility forward’

As coined by the legendary financial writer Raymond Devoe Jr. within the San Jose Mercury News in 1986: “This is applicable to shares or commodities which have gone into free-fall descent after which rallied briefly. Should you threw a useless cat off a 50-story constructing, it would bounce when it hit the sidewalk. However don’t confuse that bounce with renewed life. It’s nonetheless a useless cat.”

Most funding banks nonetheless see this market as a bouncing useless cat.

Morgan Stanley has repeatedly argued that the current inventory market rally is nothing however a bear market trap, whereas Bank of America has warned that shares have extra room to fall based on historical trends.

And now, even the sometimes extra bullish wealth administration places of work are starting to sound the alarm concerning the current rally in shares.

Wealth administration’s warning

Mark Haefele, the chief funding officer at UBS World Wealth Administration, has been on the bullish aspect, as he doesn’t see a U.S. recession because the “base case” over the approaching 12 months, in contrast to a lot of his friends within the funding banking business.

Nonetheless, the CIO stated that regardless of proof that inflation is slowing, buyers shouldn’t be too keen to leap again into the high-flying development shares that outperformed in the course of the pandemic.

“We’d warning buyers in opposition to chasing this rally,” he wrote in a Tuesday analysis observe. “We count on renewed market volatility forward, and we proceed to advocate positioning portfolios for resilience underneath numerous eventualities.”

Haefele famous that though inflation could have hit its peak in July, with shopper costs remaining flat month-over-month and year-over-year value will increase dropping to eight.5%, he’s nonetheless apprehensive about financial development.

The CIO pointed to weaker-than-expected July manufacturing and consumer spending information from China and the continued downturn within the NAHB housing index, which measures sentiment amongst builders of U.S. single-family houses, as proof that there are persistent development points within the international financial system.

Chinese language retail gross sales grew by simply 2.7% from a 12 months in the past in July, properly beneath the 5% development forecast by a Reuters poll. Industrial manufacturing additionally missed analysts’ expectations this month, whereas actual property gross sales dropped sharply in June. 

Ipek Oskardeskaya, a senior analyst on the on-line financial institution Swissquote, advised Fortune that this “unhealthy information” from China “weighs on recession worries for the remainder of the world” as buyers start to query whether or not international financial development will start to falter. 

Within the U.S., the NAHB housing index is now down 35 factors year-to-date as properly, marking the quickest decline in dwelling builders’ sentiment within the historical past of the index, excluding 2020’s pandemic-induced drop. It’s one more signal that the Fed’s rate of interest hikes are cooling the as soon as red-hot market.

Haefele stated that regardless of this unfavourable information, hopes of a “gentle touchdown” for the U.S. financial system—the place the Federal Reserve’s rate of interest hikes deliver inflation down with out instigating a recession— have been reinvigorated in current weeks with some buyers even discussing “FOMO (“worry of lacking out”) and a Goldilocks final result.”

However he cautioned his shoppers to not get too excited. 

“It’s additionally untimely to imagine that recession threat is now low. The Fed nonetheless desires development to sluggish to make sure that inflation falls again close to the two% goal, and as soon as development will get to round 1%, the financial system is weak to any threat—of which there are lots of—tipping it right into a recession,” he wrote.

Haefele beneficial buyers stay chubby worth shares, dividend gamers, and healthcare and vitality names.

“We proceed to advocate a comparatively cautious strategy,” he concluded.

Join the Fortune Features e-mail listing so that you don’t miss our largest options, unique interviews, and investigations.