- The recent sell-off in stocks could be a warning sign for what's coming for the economy, Mark Mobius said.
- The billionaire investor flagged the risk of recession in an interview with The Economic Times.
- Mobius said it was a good time for investors to hold around 20% of their portfolio in cash.
The stock market's steep sell-off this week wasn't a freak event, and the recent pullback could be a signal that there is more trouble ahead for the economy, according to billionaire investor Mark Mobius.
The Mobius Capital Partners CEO pointed to the rout in global stocks on Monday, with the S&P 500 notching its worst single-day loss in two years after economic data in the US came in surprisingly weak and the Bank of Japan hiked interest rates, fueling selling pressure among investors.
Some commentators have argued that the sell-off was a healthy pullback in US equities, given how high valuations have climbd. Yet, it's more likely that the rout was caused by deeper issues in the economy and the political climate, Mobius told The Economic Times in an interview on Thursday.
"It was not technical in nature," Mobius said of Monday's sell-off, pointing to rising geopolitical tensions around the world, as well as the upcoming US presidential election. "All of these put together create a great deal of uncertainty. And then the situation in Japan set off a chain reaction, and, of course, the US market came down."
Stocks could have more downside on the way, Mobius suggested. The carry trade unwind — which emerged as a culprit of the sell-off this week —likely has more room to run, he predicted,echoing other Wall Street strategists.
Meanwhile, the economy looks like it could have "more problems going forward." Recession fears spiked this week after the job market slowed more than expected in July.
Warnings of an economic slowdown also reside in the money supply, which the Fed has reduced "dramatically" as it attempted to bring down inflation over the past few years, Mobius added.
"We are now feeling the effects of this reduction. If you look at the money supply growth in America, it is very low now," he said. "That means not much money is going to go into the market or business or in the economy. So, this is a real problem and a longer-term problem going forward. We have more problems in the US and, that will affect the global situation unless the money supply is increased much more than it is now."
For investors, it could be a good time to keep more cash on the sidelines, Mobius said. Disruptions in the stock market are usually the signal "before the actual economic effects are seen," he added.
"I think it is a good idea to have maybe 20% of your portfolio in cash, maybe a little more, because there will be opportunities down the road and it is a good idea to have some dry powder, let us put it that way," he said.
Stocks stabilized this week after the deep rout on Monday, and sentiment on Wall Street still generally optimistic, given solid economic growth and ambitious expectations for Fed rate cuts.
A full-fledged bear market is unlikely, Bank of America said, as the market isn't flashing technical signals that would suggest a peak in stock prices.