3 Big Risks Sidelining Investor Capital

by | Feb 27, 2023

After sliding off the peak for the better part of last year, investor flows into stocks finally turned negative, signaling a critical shift in investor sentiment.

The chart above from Yardeni Research tracks total investor flows into equity-oriented mutual funds and ETF over the last 10 years. As of the end of December, investors aren’t simply buying less stocks… they’re now net sellers.

Markets could be entering a “Risk-Off for Real” environment.

Capital is headed for the sidelines. And I see three big risks looming over investor’s heads that will make cash king over the coming months.

The first is the Federal Reserve.

Markets are coming to grips with the fact that the Fed must hike higher for longer. That drags down spending, which drags down corporate earnings. Not to mention the fact that higher interest rates make future earnings worth less today. Stock prices will fall to adjust.

Plus, given the stubborn tightness in labor markets and consumer strength, inflation could prove tougher to beat than anyone expects.

The second big risk is war.

The war in Ukraine has remained within Ukraine. But recent events show the potential for war spilling over those borders.

For instance:

  • The Biden Administration is very loudly claiming that China has clear intentions of providing direct military aid to Russia.
  • The U.S., along with its allies, have stepped up military aid to include fighter jets and tanks.
  • Russian drones have been seen patrolling Norwegian and Dutch energy infrastructure in the North Sea, raising the potential for direct attacks on NATO countries.
  • Given investigative reporter Seymour Hersh’s report providing evidence that the U.S. sabotaged the Nord Stream pipeline back in September, one could see why Russia may consider retaliating. Make of it what you will, but I find these claims hard to dismiss.

And between tension in Taiwan, North Korean missile tests, Chinese spy balloons, and Iranian support for Russia, the geopolitical atmosphere is only heating up.

The third big risk is the potential for the debt ceiling debate to turn truly ugly.

Whether or not Republicans dig in their heels on spending remains to be seen. But Republicans view brinkmanship as an advantage going into elections. And you shouldn’t rule out government shut-downs and the rising risk of Treasury default as we move through spring.The tide on equities has turned. So keep your positions light and your powder dry.

Take What the Markets Give You

Don Yocham, CFA

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