To Fear Or Fight The Fed

While Wednesday's FOMC rate cut announcement stole the spotlight from other data points and prognostications recently, there was certainly a lot going on for investors to digest or brush off. Between the Bank of America Fund Manager Survey to the Duke CEO Survey, investors and analysts alike kept their head on a swivel heading into the Fed's announced 25 bps rate cut.

The key takeaway with regards to the economy or the market has been that while both have performed rather well in 2019, they have done so under a cloak of great pessimism. A survey of 225 chief financial officers by Duke University shows pessimism on the U.S. economy has been growing steadily this year, despite record low unemployment and strong consumer spending.

The quarterly Duke University/CFO Global Business Outlook of 225 CFOs found that a majority of U.S. CFOs (53%) believe that the country will be in a recession by the end of the third quarter next year. Sixty-seven percent see a recession by the end of 2020.

“Dr. No is back,” Duke University Finance Professor John Graham, the author of the report, said, referring to the increasing pessimism of CFOs. Those “growing more pessimistic outnumbers those growing more optimistic by a five to one margin.”

While the CFO survey indicates levels of optimism or pessimism, it doesn't tell us why? As investors and analysts who are bombarded with the daily trade headlines, however, we understand that the protracted trade feud has been the main contributor to the global growth slowdown and general pessimism.

As shown in the Bank of America FMS chart above, Fund managers aren’t optimistic on trade, making the expectation of a deal the non-consensus thesis. In fact, the trade war was considered the biggest tail risk in the latest FMS, which was conducted from September 6-12. However, it fell from getting about 50% of the vote to about 40 percent. As displayed in the chart below, over 35% of managers think the U.S. China trade war is the new normal which won’t be resolved. Less than 5% see it being resolved this year. Twenty-five percent say a deal will be made before the U.S. presidential election in 2020.

Regardless of this pessimistic attitude regarding the economy, mainly attributable to the trade war, fund managers have still been chasing equities higher.

Cash levels fell from 5.7% in June to 4.7% in September as managers might be chasing equities. They are chasing U.S. stocks for the most part. As displayed in the chart above, allocation to U.S. stocks increased 15 points to a net 17% overweight, the biggest jump since June 2018.

With regards to the latest FMS, it should be recognized that fund managers generally underperform the benchmark returns for any given calendar year. As such, investors should not consider the FMS as a guide for market positioning and or portfolio modeling.

Our final investor survey came Thursday and in the form of the AAII survey of investor sentiment.

Bullish sentiment has been slowly moving higher over the last 3 weeks, but still remains below the historical average. Having said that, the bearish sentiment has finally tipped under the historical average. With the S&P 500 near record highs once again and earnings relatively flat YoY, the survey may prove a contrarian indicator or a near term top in markets is ahead.

As noted previously, while investor sentiment has waned for much of 2019 and of late, the economic data has proven rather strong. The economic data has largely surprised to the upside for much of the hard data and some of the so-called soft data. We've made note of the economic data surprises to the upside as reflected by the Citi Economic Surprise Index moving into positive territory. But Bespoke Investment Group also has an Economic Surprise Index of its own that has shown a very similar result. (See Chart Below)

And speaking of stronger than expected economic data, the housing sector data released Wednesday also proved to come in ahead of economists' expectations. Total housing starts in August were above expectations, and starts for June and July were revised up combined.  This was the highest level of starts in 12 years. The housing starts report showed starts were up 12.3% in August compared to July, and starts were up 6.6% year-over-year compared to August 2018.

Single family starts were up 3.4% year-over-year, and multi-family starts were up 13.7% YoY.   Much of the strength this month was in the volatile multi-family sector. Starts were up 6.6% in August compared to August 2018. Year-to-date, starts are down 1.8% compared to the same period in 2018.

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David Moadel 2 years ago Contributor's comment

Recency bias looms large -- ain't that the truth!

Brittany Lacey 2 years ago Member's comment