A recent Bloomberg MLIV Pulse survey reveals that with the Federal Reserve continuing to cut interest rates, most respondents predict that U.S. stocks will outperform government and corporate bond markets for the remainder of the year. Specifically, 60% of respondents are optimistic about the fourth-quarter performance of U.S. stocks. Meanwhile, 59% prefer emerging markets over developed ones and avoid traditional safe-haven assets like U.S. Treasury bonds, the dollar, and gold.
This risk preference aligns with the bullish sentiment on Wall Street following the Fed's rate cut this month. Additionally, a significant rise in Chinese stocks, bolstered by increased economic stimulus, has further boosted market confidence. BMO Wealth Management's Chief Investment Officer Yung-Yu Ma noted that the primary challenge for the U.S. economy is high short-term interest rates, leading them to favor risk assets and U.S. stocks, with plans to increase holdings during market pullbacks.
On September 18, the Federal Reserve lowered the benchmark interest rate and signaled further cuts in the remaining two meetings of the year. Most respondents (59%) anticipate a 25 basis point cut at each meeting, while 34% expect larger cuts of 75 or 100 basis points per meeting. This forecast aligns closely with swap traders, who generally foresee a total rate cut of around 75 basis points by year-end. Increased confidence in the Fed's ability to achieve a soft landing for the economy has driven the S&P 500 Index to trend upwards in September, marking the first such rise since 2019.
Goldman Sachs Asset Management’s Multi-Sector Investment Chief Lindsay Rosner stated that the Fed and other central banks still have ample room for rate cuts, laying a solid foundation for the U.S. economy and making valuations more reasonable. However, when asked which trades to avoid for the rest of the year, 36% of respondents advised against buying oil, and 29% suggested avoiding U.S. Treasury bonds.
Despite potential boosts to the bond market from rate cuts, strong job market performance leaves investors divided on the Fed's pace of easing, with many questions remaining about the fixed income market. Bloomberg strategist Simon White pointed out that the term premium on longer-term U.S. Treasury bonds will rise, liquidity risks have increased, and may further deteriorate.
Moreover, the MLIV Pulse macro strategist survey indicated limited enthusiasm for the dollar as a traditional safe-haven asset. Around 80% of respondents expect the dollar to remain stable or decline by over 1% by year-end. The survey, conducted from September 23 to 27, included portfolio managers, economists, and retail investors. This week's survey also asked whether commercial real estate debt has seen the worst.
