3 potential risks to equities this strategist anticipates

US Bank Asset Management Group CIO Eric Freedman sees three major concerns for domestic equities, beginning with the commercial real estate sector.

“If we see some challenges to fixed-income, we see some auctions go the wrong way, and interest rates turn higher, that could be a challenge for commercial real estate,” he explains to Yahoo Finance. He adds that the sector will certainly feel pressure if rates breach a 5% level.

His second concern lies in potential challenges to liquidity: “Whether it was what was happening in the Treasury market, whether it was happening with the tapering process from the Fed, that’s something that we think will reverse in May."

Freedman’s third and final concern is reliance on large-cap tech: “We do think that corporate CapEx [capital expenditure] is still there. We think there’s still delivery in terms of corporations spending on big data, AI, as well as cyber,” he explains, adding: “If those reverse, we’d have some concerns."

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This post was written by Melanie Riehl

Video transcript

So, Eric, you, you want to be overweight domestic equities.

I'm just curious what worries you though, Eric, you know what, what are the risks you would call out the downside risk to your call?

Yeah, a couple of things.

One would be some pressure in commercial real estate.

You mentioned reeds earlier doing well.

And, and Julie to your point about uh some of the positives in the fixed income market, there is a decent 30 year bond auction today and that really has kept the, the rates uh if you will contained and that's what you're seeing really bolster if you will res also utilities, utilities also has an A IA I play as we all have been talking about.

But I think the first issue would be if we see some challenges to fixed income, we see some auctions go the wrong way and interest rates turn higher.

That could be a challenge for commercial real estate.

The trigger we're using is about five and a quarter to 5.5 in the US 10 year treasury.

We're obviously well below that right now.

But again, we've been close to breaching that 5% level.

A couple of times, we obviously did breach it in October of last year.

So issue number one, Josh would be commercial real estate.

The second would be challenges to liquidity.

Again, we had a liquidity drag down to get too technical.

But whether it was what was happening in the Treasury market, whether it was happening with uh the the tapering process from the fed, that's something that we think will reverse in May.

So if we don't see again, concerns on the liquidity side, that's obviously a good thing for our positions.

But if we do see some bumps in the night, if you will, with respect to liquidity, that would be an issue.

Last thing I'll say is this, if we start to see some of the uh broadening participation reverse and we rely back on, on large cap tech that for us would be problematic just because again, we do think that corporate Capex is still there.

We think there's still delivery in terms of corporation spending on big data A I as well as cyber, those trends we think are embedded.

If those reverse, we'd have some concerns, but those would be three risks that we have to our, our current thought process.

But uh again, this is a market where we're having, we're sort of short on hubris and, and long on, on stops if you will making sure that we're taking shots where we have opportunities.

But also, you know, recognizing that there's a very fluid dynamic in front of us, especially as we get closer to the election.