It turns out that anticipating a pivot to safe haven trades might have been a bit premature as a generally good start to the Q3 earnings season and a better-than-expected retail sales report for September supported the notion that a recession may not be imminent. For as much as we’ve heard warnings from major retailers and the data bears out that consumers are getting weighed down by debt loads and high interest rates, they still seem to be spending at a pretty healthy clip. Normally, that would have triggered a response from the markets where Fed rate hike expectations went up, but we haven’t really seen that this time around. The odds of another rate hike in this cycle went from 38% to around 50%, not nearly the type of reaction we’ve seen in the recent past when a strong report like this would come out. The market seems to believe that the Fed has likely concluded its monetary tightening policy here and is comfortable letting the bond market do any further tightening for it. Credit card interest rates are several hundred points higher than they were several quarters ago and 30-year mortgage rates are above 8% for the first time since the tech bubble. Add in the lagged effect of past rate hikes and the Fed should feel comfortable that it’s done enough.
In terms of market response, large-caps are up so far this week. Utilities are also up, but underperforming. Small-caps and high beta stocks are outperforming, but growth and tech are weaker than might be expected. It’s mostly a reversal of last week’s risk-off sentiment and shows that investors are still willing to be buyers under the right conditions. Inflation and geopolitics dominated last week, but good old fashioned economic strength shows that the markets might have a tough time cracking in the near-term as long as the numbers still look good. This has been a fairly consistent theme for a while now and the “stronger for longer” narrative has done a fairly reliable job of providing a safety net for risk asset prices.
Along those same lines, the latest BofA Global Fund Manager Survey just came out and one number in particular caught my attention. 30% of respondents are expecting a “hard landing”, up from 21% just a month ago. While “soft landing” still wins a majority of the votes, this signifies that sentiment is degrading and potentially going to get worse as we head into the end of the year. Within the same survey, the reading of overall market sentiment dropped compared to last month, while the percentage of cash within portfolio allocations went up. This is relatively consistent with what we’re seeing in the risk signals right now. Short-term conditions indicate elevated risk of volatility as market conditions evolve, but the longer-term outlook looks more muddled. The conflict in Israel was enough to send short-term sentiment in a risk-off direction temporarily, but this week’s data, both earnings and macro, suggest that the overall economic strength narrative is still winning out with investors.
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