Interest rates

Fund managers expect the market to fall another 12pc

Asked what companies should do with excess capital, 41% of executives want them to strengthen their balance sheets, up from 34% a month earlier; redemptions or capital expenditures are very far off.

The proportion of funds expecting a stronger economy hit a historic low, while the proportion expecting stagnation fell from 66% a month ago to 77%, the highest since August 2008 .

Global earnings expectations are at levels not seen since the peak of the COVID-19 panic in April 2020 and, before that, the collapse of Lehman Brothers.

Equity asset allocations have fallen across the board, but what fund managers want most are defensive stocks; healthcare stocks, commodities, consumer staples stocks, real estate investment trusts and utilities are popular, while technology, emerging markets and European stocks are the outsiders.

Even Bank of America’s ultra-bearish chief strategist Michael Hartnett sees the case for a rally given that sentiment can’t fall much further.

Indeed, on Tuesday night, Wall Street recorded another night of gains, taking gains over the past four trading days to just over 4%.

But for Hartnett, any rally would be a bear rally. That’s because one signal from the survey stands out as being very different from previous bear markets – the expected trajectory of US interest rates.

According to Hartnett, we haven’t seen a complete investor sell-off, as the majority – 78%, in fact – expect short-term interest rates to rise, not fall.

In other words, investors are so confident that the US Federal Reserve will have to do more to fight inflation than the prospect of a “Fed Put” – that moment when the Fed historically stepped in to support stocks – s move away.

Hartnett says survey data suggests respondents see a Fed Put happening when the S&The P 500 index hit 3529 points, down from last month’s forecast of a Fed put at 3637.

Obviously, these levels are only illustrative – no survey (or strategist) could ever hope to be so accurate.

But Hartnett’s point is that investors think the market can drop at least another 12% before the Fed steps in – meaning “equities [are] subject to an impending bearish rally, but ultimate lows are yet to be reached.”

Hartnett and other strategists, such as Credit Suisse strategy guru Zoltan Pozsar, argue that the Fed will have to crack US stock markets and/or the US consumer to create the kind of economic shock needed to bring inflation under control. galloping.

Pozsar even says positive signs — strong cash reserves held by households and businesses, stock market rallies and economic growth — could force the Fed to tighten financial conditions even further.

Fed Chairman Jerome Powell appeared to back that point Tuesday night at a Wall Street trade event, saying the central bank would go hard until it sees inflation not just coming down, but firmly retired.

“What we need is a clear and convincing decline in inflation, and we’re going to keep pushing until we see that,” he said.

“If it means going beyond widely understood levels of neutrality [interest rates]we will not hesitate at all to do so.

The obvious danger of such an aggressive approach is that the United States slips into recession, which would have global ramifications.

But the jury is still out on whether that is happening, and some on Wall Street think equity investors may have become too worried.

JPMorgan strategist Marko Kolanovic calculates that US stock markets are pricing a 70% chance of a US recession in the near term, but that’s far more than the 50% chance assigned by the investment grade debt market investment, the 30% probability taken into account by the high-yield debt market and the 20% probability in the interest rate markets.

“Either the stock markets prove right and a recession occurs, leading to much larger declines in bond yields, or the rate markets prove right and a recession is averted, inducing a stock market rally,” Kolanovic said.