Treasuries offer value while stocks are at risk, investors say

By Edward Harrison

AcleAr majority of investors expect a US recession before 2024 is out, leading them to view the current bull market in stocks as ephemeral and to favor long-term US Treasuries.

That’s the takeaway from the latest Markets Live Pulse survey, which showed that roughly two-thirds of the 410 respondents anticipate a downturn in the world’s biggest economy by the end of next year. A minority of 20 percent of pollees even sees a slump in 2023, at a time when the Federal Reserve’s own staff have ditched their recession forecast altogether.

Survey respondents appear to be looking past the economy’s current resilience and anticipating further damaging ripple effects from the Fed’s 5.25 percentage points of cumulative tightening over the past 16 months. The Fed lifted its benchmark rate to the highest in more than two decades last month and Chair Jerome Powell signaled additional hikes are possible.

The poll results are consistent with pricing in Fed funds futures, which show traders expect the central bank to cut interest rates multiple times in 2024, by more than one percentage point in aggregate, pany’s public relations department not to discuss deflation publicly.

A big driver of low prices this year is the build-up of inventories over the pandemic, and in the first quarter during a burst of optimism following the end of Covid restrictions. That has since reversed, with businesses cutting prices to reduce their stock.

Vivian Feng is a Shanghai resident who purchases discounted goods, from farm products to Nike Inc.’s tshirts, and sells them to neighbors of her residential community. She said her suppliers have cut prices significantly this year due to high ostensibly in response to eventual economic weakness.

The upshot is that investors see value in long-term Treasuries, with yields at one point last week threatening to test the multiyear highs touched in October. As they chart their allocation choices for the year ahead, survey respondents seem to be unbowed by last week’s bondmarket slide, which came against the backdrop of the Treasury’s announcement that it will boost issuance, and as Fitch Ratings downgraded US sovereign debt. Treasuries recouped some ground Friday on data showing job growth in July was less than forecast.

Investors are likely betting that the Fed will pivot to rate cuts in 2024, making long-maturity debt attractive despite the more than 1 1/4 percentage points of yield pickup currently available on short-dated bills. Almost 60 percent of Pulse participants say now is a good time to buy Treasury securities with maturities longer than seven years. Of inventories and soft demand.

“Some well-established apparel brands used to offer products for the group-buy channel at around 40 percent of the original prices in 2021, and they’re now selling at just 10 percent or even less,” said Feng.

Some economists expect consumer inflation to trend lower for a few more months before picking up toward the end of the year as the higher base of comparison with last year fades and domestic demand picks up. Economists surveyed by Bloomberg expect full-year inflation to reach just 0.8 percent in 2023, the note, 59 percent of the responses came in before the Fitch downgrade on August 1.

Survey respondents appear to be looking past the economy’s current resilience and anticipating further damaging ripple effects from the Fed’s 5.25 percentage points of cumulative tightening over the past 16 months. The Fed lifted its benchmark rate to the highest in more than two decades last month and Chair Jerome Powell signaled additional hikes are possible.

Still, the survey results signal a problematic backdrop for US stocks, which have roared higher in 2023, pushing the Nasdaq 100 to its best first half in history, thanks in no small part to an artificial intelligence-fueled surge. Market valuations have risen accordingly. The S&P 500 trades at a multiple of roughly 20 times earnings, where Yardeni Research data show that the 20-year average is closer to 16 times.

The biggest chunk of Pulse survey respondents, 47 percent, say the US stock market is a bubble powered by irrational exuberance, and a quarter slowest pace since 2009.

Low inflation is driving up real, or inflation-adjusted, interest rates in the economy, pushing up businesses’ debt-servicing costs and undermining the central bank’s pledge to spur lending.

While that increases the case for the PBOC to add stimulus to the economy, the central bank is facing several constraints that’s making it cautious, including a weaker yuan and elevated debt levels in the economy. Central bank officials have hinted at some easing measures, such as re- view it as being in a bear market rally.

Meanwhile, 28 percent say it’s a bull market that has more room to run.

European investors are more pessimistic than North American peers about US stocks.

Driving home the preponderance of bearish views the survey elicited, more than two-thirds of respondents say the S&P 500 is still mired in an earnings recession that has longer to run. Another survey element underscores the complexity of the macroeconomic risks that investors must account for as they look to the year ahead.

Almost three quarters of poll respondents expect core inflation as measured by the personal consumption expenditures index—the Fed’s preferred inflation gauge—to either remain above 3 percent for the next 12 months, or to dip below that level but then rebound. It’s 4.1 percent now, the lowest since 2021. It’s a view that stands in contrast to both the bullish survey response on long-maturity Treasuries and to market bets on rate cuts kicking in next year. And it suggests that many expect such a severe economic downturn at some point that the Fed will be easing policy even though inflation remains elevated. Hence, the worries about equities. Bloomberg ducing the amount of cash that banks must hold in reserves. Economists also predict a 10 basis-point policy rate cut in the third quarter.

“The ongoing weakness in China data will continue to dampen consumption, as households will remain cautious about making purchases of big-ticket items given the potential risks of job losses and salary cut,” said Ken Cheung, chief FX strategist at Mizuho Bank Ltd. “The uncertainties surrounding deflation may prompt the PBOC to implement additional monetary easing measures.” With assistance from Daniela Wei and Tom Hancock