now everyone is watching from the window – Corriere.it

Looking at the S&P 500 index fluctuating around 4,000 points for three weeks, one would say that Wall Street is in one of those phases that operators call reflection. It is unclear what investors are thinking about: perhaps the pivot, the presumed turn in the Fed’s monetary policy; perhaps on the advent of a hypothetical recession in the coming months; perhaps on the slow and continuous decline in corporate profits, as analysts’ estimates for 2023 suggest, which are always slightly reduced from week to week.

It would appear to be the typical condition of those waiting for a clear answer from the economy or from the Fed, so as to direct the stock market towards a certain path: growth or sharp decline. In reality, confusion dominates. The most inveterate pessimists, such as the men of Bank of America and Morgan Stanley, those who pointed to the index falling towards 3 thousand points, have been inviting for some weeks to buy shares because the rise accrued after November 10th still has some way to go: perhaps above the S&P’s 4,100 or even above 4,200 points.

For Deutsche Bank analysts, the first to predict a recession in America since last spring, Wall Street can now rise to 4,500 by June: only to then fall by 25%. Instead, the eternal optimists of JPMorgan are now inviting not to buy and to be wary of this rally, because (as Michael Feroli, chief economist predicts) the recession will arrive, albeit mild, in the second half of next year. Pragmatists at Goldman Sachs see the index nailed where it is now throughout December, but it could lose 10% in the first three months of 2023, they say. And then there are those who love statistics according to which the stock market should rise by an abundant 2% between now and the end of the year, because it has (almost) always happened this way, thanks to Santa Klaus. And those who, analyzing the flows, have calculated 15 billion (at least) of fresh money, ready to pour into the stock exchange every day from computerized management (Cta) and from purchases of treasury shares (buyback).

The last minute

And finally, there is an abundance of those who have rediscovered hope in the goodness of the Fed which, as can be understood from the latest Fomc Minutes, is preparing to reduce the pace of monetary tightening and perhaps reverse its trend. They had already put this idea into their heads on November 10, when, with inflation readings (CPI) slightly lower than expected, Wall Street had flown by more than 5% and the yield on the 10-year Treasury was down 20 cents.

This conviction still holds today, although in the speeches of a half dozen Fed members (including Jerome Powell) a clear message has instead emerged: rates will still rise higher than expected and will remain for a longer period. The paradox is that, while Wall Street was lulled into the idea of ​​a sharp reversal of monetary policy, at the CME (the interest rate futures market) the probabilities of a Fed Fund at 5-5.25% for July have doubled (at 60% against 30% a month ago) and those of a rate at 4.75-5% for December 2023 have risen to 45% (against 27% a month earlier). The mythologized pivot would result in an insignificant filing of 25 cents.

In short, it really is not clear how things could go. Even the operators of Goldman Sachs admit it, after having analyzed the movements of 786 hedge funds (2,300 billion managed) whose purchases and sales have been reduced to a minimum, as if their managers had no idea what to do, bewildered by an indeterminacy leading to opposite outcomes. The sensation confirmed by JPM’s customers, among whom the intention to buy stocks has more than halved compared to October, given that only 33% say they want to increase equity exposure. In the face of uncertainty, it is better to stand still and see what happens, and in this delay, speculative funds are proving to be more cautious than traditional managers.

Recession has now become the most likely scenario. By now everyone is forecasting it for next year, at least that’s what they say: and, if it were, it would be the most heralded recession in history. 77% of managers interviewed in the latest BofA survey expect it: a very high percentage, if one considers that in August 2008, on the eve of the Lehman crack, it was estimated by no more than 65% of operators to exceed 80% December, when even to the naive it was clear that it was the deepest crisis since 1929.

In the past

How reliable these forecasts are is revealed by the JPM survey in which the probability of a recession is given at just 45%. But be careful: at the end of 2008 the estimate had not exceeded 25%, still lower than that of 1998, when there was no recession. While admitting that the American economy (and obviously the European one) will contract next year, the universe of analysts assumes that it will be a mild recession, a hiccup no longer than two quarters and without serious consequences on corporate profits. And, therefore, without major repercussions on the stock exchange which, indeed, should once again benefit from the benevolent hand of the Fed, which will hasten to reduce interest rates. The possibility of a financial crisis, not so unusual after the collapse of cryptocurrencies and with a world debt estimated by S&P Global at 349% of GDP, much higher than that calculated in 2008 (278%), for now hypothesized only by Michael Hartnett of BofA.

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