With opinion divided whether equities is the best place to be right now with the global economy remaining weak, one analyst argues that caution is better than risk and says currently cash is the best option.
"We screwed up in bonds as we had been underweight and it would have been nice to have enjoyed that rally now we are in a cash overweight position, which admittedly is a bit uncomfortable. Preserving capital right now is the best course of action right now," said Larry Hatheway, chief economist at UBS.
He warned against the view that equities are a better investment class than bonds or cash and the data supporting a rally in equities is mixed.
"The reality is that we would love to see some good bottom-up data that we saw last season and that will likely see in July. The thing that is of some concern is the weakness of the US labor marketand the soft patch, which is becoming clearer now. I do think that profits and share margins have arguably peaked," he said.
"That doesn’t necessarily mean we’re going to see a decline in profitability but probably some of the best numbers are behind us, still I think earnings are supportive, valuations are supportive. The critical issue now is whether the economy is entering a period of prolonged softness that the markets have to consider," he added.
He argued that the markets would likely head lower, at least in the short term, before a possible rally later in the year.
"In terms of stock market correction and the S&P 500 will see 1250 or lower maybe a 7 to 10 percent correction which certainly looks plausible to us and things are unfolding as we speak so some of this may occur over the next month or so. The market will find some support in the next reporting season but my sense is that the next 4-6 weeks look a bit patchy," he added.
There is continued uncertainty over what action the Federal Reserve will take to follow up its previous two rounds of quantitative easing.
The latest round concludes in June, and analysts have been split over whether the Federal Reserve will inject more liquidity into the US system on the back of softer economic data.
Last week's US Labor Department report showed that unemployment had crept up to 9.1 percent, and nonfarm payroll data showed that employers added just 54,000 jobs in May, well off the market's expectations, calling into question the strength of the country's recovery.
"One of the challenges is what the Fed will do, and they told us at their two day meeting that all options are on the table. But Bernanke also stressed that there are costs as well as benefits to QE (quantitative easing) and in some sense he was raising the barrier. Next time we have to contemplate this we are probably going to have to have a more compelling reason, and therein lies the problem for equities," Hatheway said.
"The Fed is going to have to see a higher threshold and a deeper soft patch before it goes to a QE3 which ultimately means we’ll have to see a deeper soft patch and more trouble for equities first. The downside risk is that there is more uncertainty about policy rather than economic weakness,” he said.