Thanks to everyone who responded to our survey. These are meant to create a quick measure of sentiment on important, topical questions. Rather than a broad survey, these will be concentrated (short) and focused on the questions we think are most pressing for clients today.
Please hit us back with feedback – our goal is to help, after all.
Quick summary, most investors think:
On to the results.
Searching for a Bottom: There are a lot of moving parts today and though we think economic growth will slow, bringing inflation down, that outcome is far from clear. This week we asked clients where they would-be buyers of the S&P IN THE ABSENCE OF OTHER DATA. So, without a change in trend economic growth/inflation/rate hike expectations/earnings/etc., these levels are where investors would find the market attractive. About half of respondents think the market is attractive within ~5% of its current level with most of those (~40%) concentrated around -2.5% to -4.5%. The next biggest percentage of buys is around -10%. There is a long tail though, with 6% of respondents who wants to see the S&P fall -20% or more.
Style Disagreement: There is no sign of broad financial leverage like in the GFC. Over-investment is not at the level it was during the TMT bust. Employment is robust, and delinquencies on consumer debt (autos, homes, credit cards) are VERY low. All of those are reasons we expect a mild recession if one happens near-term (early 2023 is about the earliest that is reasonable). Under a weak recession backdrop, a plurality of respondents expect Value to outperform, but another third think Growth factors will be best.
Value has been on a tear recently, posting near-record gains m/m while tracing the extreme backup in real yields. If a mild recession becomes the base case for the economy, 10yr yield gains should be limited while inflation moves lower and growth slows. Remember that implied real yields are based on inflation expectations, which are already well off their highs (3.1% currently down from 3.6% in April). CPI trending lower over the next 2 or 3 quarters does not mean inflation expectations need to fall sharply. That should keep real yields from spiking the way they have and create a headwind to further Value gains.
Markets are adaptive and no period plays out exactly like another, which is part of the reason we are not overly keen on event studies. Knowing how people expect OTHERS to react to market events is potentially more informative than knowing how markets have moved on past similar events. At the factor level, what we find today is:
Taken together, these results suggest risk-off factors could do surprisingly well if a mild recession becomes the base case for investors. For what it’s worth, Value AND Growth are underperforming today. Given the high level of volatility though, we would not read too much into any single day’s price action.
