Fund managers expect a soft landing. They also expect a recession.
If that seems contradictory to you, I won’t disagree, but silly as it sounds, there’s a lot of nuance to be had when it comes to various “landing” scenarios for the global (and particularly for the US) economy.
A mild recession, for example, could be consistent with a soft landing. And a so-called “no landing” could become a hard landing in the event robust demand keeps inflation elevated in the developed world, forcing policymakers to persist in rate hikes.
It’s with that in mind that I highlight the figure on the left below, which shows that although the share of respondents to BofA’s Global Fund Manager survey who see no downturn is rising, the majority still expect “some sort of recession” over the next year, as the bank’s Michael Hartnett put it on Tuesday. “Investors remain bearish economic growth,” he said.
The perceived timing of a downturn has been pushed out, though, and as the figure on the right shows, 64% now see a soft landing, up from last month, and more than double the share who expect a hard landing.
The June vintage of the BofA poll (which included responses from some 250 participants with more than $700 billion in AUM) showed the net percentage expecting stronger growth remained near lows observed around dark moments for the global economy (e.g., COVID, the Q4 2018 mini-bear market, the Q1 2016 deflation scare, the European debt crisis, the GFC and so on).
Just 2% expect higher inflation at this point, which Hartnett noted “translates into big expectations for lower short-term rates.” And yet, more survey panelists now say the Fed hasn’t finished hiking versus the share who said Jerome Powell is likely done.
“Despite FMS investors’ strong conviction that the Fed will have cut rates one year from now, expectations on the next Fed move have flip-flopped,” Hartnett went on.
Consistent with the evolution of market pricing, the first Fed cut is now seen in Q1 of next year versus the back half of 2023.
A broad measure of sentiment from the survey, which combines cash positions, equity allocations and growth expectations, remains “stubbornly low,” Hartnett said, adding that although the A.I. “‘baby bubble,’ FOMO, technicals and so on” could bolster the measure, “fundamentally, asset allocators are saying we need [a] meaningful downward surprise to rates and/or meaningful upward surprises to growth” in order to revive overall sentiment.
Who’s better at this, the 265 guys with $700 bil AUM or the 65 “seers” and tea leaf readers who are members of the AEA?
Oop, my bad, 250 managers.
Can we have some fun here with our personal guesses?
I see a Fed not wanting to raise interest rates too much – because they don’t want to create a domestic banking crisis or an international debt crisis; while at the same time, the US Federal government spending continues to be significantly in excess of collected tax revenues- resulting in liquidity being added to the economy.
No way we will ever get back to 2% inflation (unless we stop printing money) and the stock market will benefit from the net effects of added liquidity less minimal interest rate increases.
Welcome to our new normal.
Money printing causing inflation is a story that has been repeated throughout the history of the world. In the 18th century, Louis XIV printed “billets de l’etat”, which the government used to pay bills, but would not accept as payment for taxes!!