Here’s the most crowded trade on Wall Street, according to Bank of America
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Better-than-expected CPI is set to light a fuse under Wall Street stocks, as some see it as helping keep the Fed in its perceived no-more-hike box.
With bond yields the data may also keep driving that end-year equity rally theory.
Onto our call of the day, from Bank of America, which talks about where the majority of investors expect the 2024 “playbook” for investing to go — and much of that has to do with a Federal Reserve backing off interest rates.
In its global fund manager survey for November, strategist Michael Hartnett and his team explain that investors have turned cautious on the macro picture.
So most expect a soft landing for the economy — interest rate hikes that have worked to slow the economy just enough, but not into a recession — lower rates, a weaker dollar and a continued bull market for large-cap tech stocks.
A net 76% of those surveyed believe the Federal Reserve hiking cycle is over, and 61% expect lower bond yields, which as the below chart shows, is the most on record:
And that’s despite the second highest number of investors ever saying fiscal policy was too stimulative, the survey finds.
The survey also shows investors have trimmed their cash levels to a two-year low of 4.7% from 5.3%, and moved to the biggest bond overweight since March 2009. And as part of that view the Fed is done hiking, investors flipped to their first equity overweight since April 2022.
Now, if the economy goes against the general thinking here and a “hard landing” or sharp slowdown kicks in, then a contrarian investor would want to be bullish on cash, short on U.S. growth stocks and Japan equities. they say. And in the case of “no landing” and higher interest rates, then long cash, dollar and commodities is the contrarian bet to make.
Hartnett and co. also laid out what they believe is the biggest contrarian play of 2024 — “long leverage, short quality.”
While he doesn’t quite break this down, sometimes but not always, leverage can refer to companies that need to borrow money, so this would imply a bullish bet on that group. But a bullish bet on those would mean no fear of an imminent credit event, that Hartnett has discussed in recent months.
As for short quality? Those contrarian investors might bet against companies with healthy balance sheets that aren’t overborrowing or overleveraging
The markets
Stock futures ES00, 1.36% YM00, 1.04% NQ00, 1.72% are soaring after slightly better than-expected CPI data, as bond yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y sink. Elsewhere, the dollar DXY dropping and gold GC00, 0.72% is climbing.
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