Investor survey shows stocks poised to hit new lows this year

(Bloomberg) — Investors have little confidence in US stocks even after this month’s rally: Most think the market has yet to bottom out amid concerns about corporate earnings.

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That is the view of about 70% of the 383 respondents to the latest MLIV Pulse survey, with the largest share – 35% – saying the bottom won’t happen until the second half of 2023. a quarter think stocks have hit their trough lows. The findings show just how shaken investors are after stocks plunged last year, with worries about the outlook for corporate profits as the economy slows.

In light of the changing landscape, nearly half of the participants said that the key to stocks this week will be quarterly results from Apple Inc., Meta Platforms Inc. and Exxon Mobil Corp., rather than a decision by the Federal Reserve or whatever Chairman Jerome Powell said Wednesday. The central bank is expected to increase by a quarter point on February 1, the smallest increase in nearly a year.

“There is a lot of negativity and uncertainty among investors right now — and for good reason,” said Michael Sheldon, chief investment officer at RDM Financial Group. “These are difficult times as financial conditions have eased in recent months with rising stock prices, which is not what the Fed wants as they are trying to contain the economy to tame inflation. .”

The S&P 500 index entered this week up 6% in 2023, on track to post its best January since 2019, as signs of slowing inflation and cooling growth fueled bets that the Fed is about to hit the ground running. end of tightening cycle. However, the most aggressive interest rate hike in decades, combined with a spiral of price increases and wage increases, has created a challenging environment for corporations to boost profits.

About 90% of survey respondents expect inflation to continue falling into 2023, but still well above the Fed’s 2% target. That aligns with doubts about equities as the question of how long inflation will stay high has made it difficult for investors to position themselves in 2023.

Stock bulls are in the minority, with only 18% of survey respondents saying they expect to increase their exposure to the S&P 500 over the next month. More than half said they would keep their exposure the same, while about 27% anticipate reducing it.

The overarching question when income arrives is the trajectory of growth. The U.S. economy is showing signs of a slight contraction that the central bank wants to see as it tries to tame inflation without triggering a sharp recession.

Forecasters expect US economic activity to contract in the second and third quarters.

“This could be the most anticipated recession the US has ever experienced, if it happens, with a number of economic indicators already signaling that it is likely,” said Sheldon of RDM Financial Group. go out. “The stock market may have bottomed out, but I wouldn’t be surprised to see more weakness in the spring as investors combine weaker economic data and lower returns.”

Bond traders expect the economic picture to get so bad the Fed will have to cut it later this year, with swap valuations that the US central bank raised its policy rate for the first time. below 5% or less by mid-2023. Part of that bet is the expectation that inflation will continue to slide, giving the Fed a chance to pivot.

“History tells us, nine months after the last rate hike, the Fed tends to cut rates,” Sam Stovall, CFRA’s chief investment strategist, said in an interview with Bloomberg TV.

That contrasts with messages from a slew of Fed officials saying they will raise rates above 5% and not lower rates this year.

More than half of survey respondents said they agree with Jeffrey Gundlach, Chief Investment Officer at DoubleLine Capital LP that it’s best to see what the bond market is saying about the Fed’s path — contrary to signals from central bank officials.

Read more: Gundlach says to listen to the bond market rather than care about interest rates

The obvious risk is that it could turn into a dream for a segment of shareholders, who were hit hard last year by the Fed’s aggressive response to rampant inflation and soaring Treasury yields. .

Some investors warn against the Fed, especially with corners of the economy – like the labor market – showing resilience in the face of higher borrowing costs. If the Fed wins the chicken game of this cycle, the pessimists in the survey will look predictable.

“The Treasury market is pretty complacent,” said Tracy Chen, portfolio manager at Brandywine Global Investment Management. “I don’t think the Fed will cut rates this year because they may not be happy with the job market situation. So there could be another sell-off for Treasuries.”

For more market analysis, check out the MLIV blog. To subscribe to MLIV Pulse stories, click here.

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