forecasts and strategies for the US stock exchanges – Corriere.it

According to some, the markets would denounce a sort of cognitive distortion, typical of dichotomous thinking, whereby everything is black and white: specifically, everything would suggest a rise in the stock exchanges or a sharp fall. According to others it would even be schizophrenia, given the dissociated behavior of many investors. There are those who see irrationality in the behavior of many market players and even in certain attitudes so speculative as to border on madness.

More likely we are witnessing an extreme radicalization of the positions between those who, by inclination or for convenience, want to see only the positive things and those who instead underline the negative signals. The result is great uncertainty or, as the managers of La Financire de l’Echiquier claim, markets in precarious equilibrium. However, there is some truth in all these explanations.

The dichotomy for all to see. It can be seen, according to La Financire, in the dozen or so technological stocks which alone have generated all the increases in the index; evident on the bond markets which, with the yield curve inverted, signal a recession, while the equity markets caress the thesis of a new major bullish cycle for the stock markets. You can see it in corporate profits, better than expected in the first quarter, while macroeconomic data are increasingly less brilliant. And the dichotomy is also evident in Europe, where a robust service activity is contrasted by a manufacturing sector in recession. Finally, it can be seen stridently in the Fed’s policy, which does not foresee any reduction in interest rates this year, while the market estimates (indeed estimated until recently) rates down by at least one percentage point for January 2024. To all this must be added another dichotomy and it regards the trend of the banking sector and of the regional institutes in particular.

In the belief that the worst is over, the sub-index of regional banks rose by more than 13% in less than three weeks, against 1% of the S&P 500, and stocks such as those of the disastrous PacWest soared by 130%. Bought from whom? Still by small investors, organized in their financial forums, as happened two years ago with GameStop. More than a dichotomy, it would be better to say madness, especially since the bleeding of deposits from minor banks does not stop and Janet Yellen (Secretary of the Treasury) herself foresees other mergers in the sector: a euphemism not to say that new bankruptcies are expected and subsequent rescues.

The strange thing is that even the entire banking sector, dominated by large institutions, had grown by 9% since May 12, the day on which Bank of America’s monthly survey of large investors had concluded. What had they said that was so curious? That the most popular trend, in addition to going long on technology stocks (ie buying them), was to sell bank shares short: a practice that would have been shared by 22% of those interviewed. Someone must have bought those shares instead and not just among the army of small operators. Just overlays? Apart from the suspicion that those polls tend to say one thing and do another, there are several indications that large institutional investors also contributed significantly to the rebound on Wall Street which, between March 13 and May 18, measure in a heady 9%. And this reveals another interesting dissociation between saying and doing.

The survey

The BofA survey indicates that investor sentiment deteriorated in May and would have fallen to near all-time lows. Understandable sentiment considering that 65% of managers expect a weaker economy (63% in April), that hopes of a strong recovery in China are fading and that the bet on a quick Fed rate cut is fading. proving more unlikely. One would expect a consequent negative reaction on the markets, given that almost 40% of managers say they are significantly underinvested on the US stock market and also on global equities. But no: between 5 and 19 May, hedge funds and funds bought with both hands, obviously in the company of corporate buybacks (purchase of treasury shares), in fear, it seems, of missing out on this sensational rise.

Paradoxically, the less rational part of the market, i.e. the small investors, has been the net seller. In fact, while declaring that things are getting worse, the big investors have also admitted that they fear less the credit risk, the recession (which if it ever happens will be soft as a pillow) and the restrictive monetary policy: in short, they see fewer risks than they feared in April. However, something unusual can be seen in the performance of almost all international stock exchanges. Bloomberg analysts note that Wall Street’s current rise, 7 months after the October 2022 low, is the largest in history, with the S&P index at least 10 percentage points higher than the bear market average since the war.

The doubt of being in the presence of a new bullish cycle, rather than the fluctuating path of a market that has not yet reached rock bottom, is largely legitimate. But history does not repeat itself the same and all the dichotomies observed, on the economy and on the markets, only increase the uncertainty. Oddo’s Frenchmen claim to be on the side of bonds, that is, to have embraced the thesis of a forthcoming recession signaled by the inverted yield curve. But the 10-year Treasury yield that jumped from 3.38% to 3.76% in two weeks, while not helping equities, could mean that a recession is unlikely for the Fed and bond market players. Let’s hope so, because if central banks really start cutting rates as the market wanted, it would be the sign of a new economic or financial crisis.

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