CIO View

Do Central Banks and CEOs know more than the rest of the market?

Does anyone remember September and October 2021? Back then, two institutions from G10 countries, the Norwegian central bank as well as the Reserve Bank of New Zealand, raised their policy rates, decisions in jurisdictions which usually are not the focus of global investors. And yet, these were the seismographs that foreshadowed the massive earthquake to hit global stock and bond markets in 2022.

Last week, in a surprise move the Swiss National Bank became the first G10 central bank to cut rates again. Is that the harbinger of a cutting wave in the making? Well, at least, last week’s central bank events and all the news fit in well with our expectation that the first rate cuts by the big central banks might happen in around three months’ time. In addition, what we saw last week seems to confirm our expectation that this will not be the start of an easing cycle, but rather a gradual normalization in policy rates.

What’s the difference? We would talk about an easing cycle when the economy falls off a cliff and the central bank rushes to the rescue. In that case, rates are being cut meeting after meeting, or even between meetings if things get really bad. By contrast, we would speak of normalization when policy rates are well above the neutral level, the degree of monetary tightness no longer seems necessary and central banks are gradually scaling back towards the neutral again. Just as the U.S. Federal Reserve (the Fed) did in 1995: Having hiked sharply in 1994, the Alan Greenspan led committee lowered the Fed funds rate in July 1995, only to take a five-month break before making the second step in December 1995, followed by a third and final cut in February 1996.

In its statement from last Wednesday, the Fed certainly did not paint the picture of the U.S. economy being at risk of falling off the cliff. On the contrary, its message came close to saying: don’t worry, we have this under control, inflation is coming down and the economy is not crushing and even doing better than expected. Positive thinkers would say that the Fed declared the Goldilocks scenario as being valid. Cynical thinkers might say: the Fed put is back, as the Fed just cannot stick to higher rates given public and private debt levels. Mr. Market, Mohamed El-Erian, was amongst the sceptics, arguing that the Fed should push out rate cuts for longer, as inflation might stay higher for longer as the supply side has become so inflexible. (1)

Markets reacted positively to the Fed, but not hysterically: the S&P 500 “only” gained 1% in the two and a half days after the Fed’s communication, while 10-year Treasury yields dropped by 10 basis points to 4.19%. Interestingly, the widely expected steepening of the yield curve only materialized immediately after the Fed’s call (as 2-year yields declined more than 10-year yields), but that movement was reversed by the end of the week. At -40bps the yield curve not only remains deeply in negative territory, but last week it also broke a record: it has been inverted now for 628 days in a row, the previous record, 624 days, was established in 1978.

Nonetheless, the S&P was up 2.3% for the entire week, jumping above 5200 points for the first time. This doesn’t make it easier for equity strategists to keep on forecasting positive returns for the rest of the year. We already explained how DWS’ experts justify the March 2025 target of 5300. Here is what Goldman is now writing about their struggles (2): “The S&P 500 index has surged by 10% YTD and this week reached our year-end target of 5200. Under our baseline forecast, EPS will rise by 8% in 2024 and 6% in 2025 while the aggregate index forward P/E multiple contracts by 8% to 19.5x (83rd percentile) at year-end from its current level of 21.1x (89th %-ile). The most frequent client question: ‘What are the possibilities around your 2024 base-line forecast?’ We explore four scenarios: 1) in a ‘catch up,’ the S&P 500 would end the year at 5800 (+11% from today), 2) in a ‘catch down,’ the S&P 500 would fall to 4500 (-14%), 3) continued mega-cap exceptionalism would lift the index to 6000 (+15%), and 4) recession fears would push the index down to 4500 (-14%).”

Last week, we also got some insight into what parts of the institutional investment community is thinking about markets through Bank of America’s Fund Manager Survey (FMS). (3) No surprises, to be honest, as it repeated the widespread perception that markets have indeed priced in a Goldilocks scenario, but haven’t yet reached red hot territory: “March’ Global FMS showed that optimism isn’t at extreme levels. The BofA Bull & Bear indicator is at 6.1 and cash levels are at 4.4% - both bullish, but not at concerning levels of optimism. The shift into Emerging Market (EM) and eurozone equities is more remarkable, with movement into EM equities the most in 7 years. Similarly, the net percentage expecting higher global economic growth and profit growth is the highest since January ’22. US commercial real estate is seen as the most likely source of a credit event and higher inflation is seen as the biggest tail risk, a change from January, when geopolitics and hard landing were bigger concerns. Fund managers were split as to whether AI stocks are in a bubble, with just 40% saying ‘yes.’”

The survey was answered some two weeks ago, we would assume. So, not sure if investors would still be so sanguine about geopolitical risks after the Kremlin tried to blame Ukraine and the West for a terrorist attack (4) in Moscow, for which ISIS claimed responsibility, and which prompted Poland to put its air force on alert after a Russian missile breached its air space.

While the FMS relies on institutional investors’ answers about their positions and convictions, there is one metric that shows the real actions of another group of powerful market participants: insider trading from CEOs. As the Financial Times reports(5): “Peter Thiel, Jeff Bezos and Mark Zuckerberg are leading a parade of corporate insiders who have sold hundreds of millions of dollars of their companies’ shares this quarter, in a signal that recent stock market exuberance could be peaking. As markets hit record highs, the ratio of corporate insider selling to insider buying is at the highest level since the first quarter of 2021, according to Verity LLC, which tracks insider trading disclosures.”

That leaves us wishing you some successful dealings for yourself ahead of the Easter Weekend.

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1. Source: Bloomberg, March 18, 2024.

2. Source: Goldman Sachs Equity Research, March 23, 2024.

3. Source: Bank of America Global Research, March 19, 2024.??????

4. Source: Reuters, March 22, 2024.

5. Source: The Financial Times, March 24, 2024.

Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Past performance is not a reliable indicator of future returns. Source: DWS Investment GmbH as of 3/25/24.