- Big money favors cyclical stocks, a sign of growing confidence.
- The stance reflects faith in the Fed’s ability to reduce inflation.
Professional investors are loading up on bets that an economic downturn can be avoided despite all warnings to the contrary. It’s a dangerous gamble, for a variety of reasons.
“The sector’s current tilts are consistent with positioning for a soft landing,” Goldman strategists including David Kostin wrote in a note on Friday, adding that fund industry thematic and factor exposures point to a similar stance.
It’s not that smart money has taken a chance. They have increased cash holdings or boosted bearish bets on stocks this year as the Fed embarked on the most aggressive inflation-fighting campaign in decades. But underneath the defensive posture is a cyclical tilt, one that is at odds with widespread concerns among the investment community that a serious economic contraction is on the horizon.
In a Bank of America Corp. survey of fund managers last month, a net 77% expected a global recession in the next 12 months, the highest proportion since the immediate aftermath of the 2020 Covid crisis.
Professionals may be slow to adjust their portfolios to reflect perceived economic risk. Or they are seeking protection from recession through other strategies, such as parking cash.
A more plausible explanation is linked to hopes that the Fed could design a soft landing. In this case, the bad economic news is seen as good for the market, as it shows that Fed Chairman Jerome Powell’s inflation-fighting campaign is working and therefore policymakers may backtrack on the aggressive pace of interest rate hikes.
The narrative, described as a pivot by the Fed, is widely cited as the reason the S&P 500 has rallied more than 10% from its October lows despite worsening data in areas such as housing and manufacturing and a reduction in earnings estimates.
“If growth deteriorates too quickly or goes too far, then ‘bad news is bad news will outweigh the narrative,'” JPMorgan Chase & Co.’s sales and trading team, including Andrew Tyler, wrote in a note Monday. “In that scenario, markets are likely to retest the 2022 lows.”
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