Home > Dynamic > Beware Wall Street's...

Beware Wall Street's most crowded trade: A soft landing next year

2023-12-18

473

Late last year, investors thought the recession was complete. The year before, they believed big tech companies would be unaffected by rate hikes. And for a year before that, they were convinced that paying top prices for stocks that the broad public loved would make them rich.

In December this year, they once again firmly believed that the economy was heading for a soft landing and low interest rates. Maybe this time they'll be right.

Then again, maybe not. For investors, there's always an uncomfortable feeling of being in a crowd, and agreeing with such a strong consensus is especially difficult because if it turns out to be wrong, the punishment from the market will be painful -- as in Same as every year for the past three years.

The consensus that the Fed will be able to cut interest rates next year without facing a recession was strong even before the Fed's dovish forecast on Wednesday. Thanks to the Fed's new "dot plot" forecast, futures traders see a 16% chance of a rate cut next month and an 82% chance of a rate cut by March.

However, the reaction to the Fed was not what the Fed predicted. Policymakers' median "dot plot" forecast for interest rates by the end of next year fell to 4.6% from 5.1%. But FedWatch, the federal funds futures market is 100% certain that interest rates will be much lower.

Instead, investors took the Fed's forecast - and Chairman Jerome Powell's response at a subsequent press conference - as being right that they thought the Fed would cut interest rates sooner rather than later and as the economy stabilizes. Towards the rarest of outcomes – a soft landing.

An outcome other than a soft landing would definitely cause problems for the market. But it’s also because there are a lot of things that happened before it happened. A soft landing is about more than just pricing, and more.

"Talking to investors, there's a strong sense that we got through this interest rate cycle without any major incidents,"

Peter Oppenheimer, chief global equity strategist at Goldman Sachs, said. "Believing this may still be a bit naive and premature. Goldman Sachs has been advocating a soft landing since last year, but the market's rapid rebound has matched the bank's forecast three weeks ago for the S&P 500 by the end of next year.

What surprises me is how little investors seem to worry that the slow-growing economy will get worse, or that inflation will become stickier than expected. Signs that interest rates are hitting the real economy are seen as outliers, while investors are willing to bet that the recent low inflation rate - below 2% annualized over the past two months - will persist, despite lower inflation rates in the previous two months. More than twice that.

Rather than worry, investors are plowing back into interest-rate-sensitive stocks that they sold off earlier this year. Speculative technology and biotech stocks soared, while banks and real estate performed well. The Ark Innovation ETF has risen 46% since the bottom, the banking sector has risen 26%, and the real estate sector has risen 20%.

The stock market has also expanded beyond the handful of big tech winners from the artificial intelligence boom, with the equal-weighted S&P 500 leading the regular cap-weighted index since then, both up more than 12%. The Russell 2000 index is up 19% since the end of October, in part because smaller companies have so much debt they need to refinance.

Investors have also shifted from fear to greed in the options market. This week the VIX indicator, a measure of implied volatility, reached levels last seen before the 2020 pandemic lockdowns. The ratio of puts to bullish calls written to protect the portfolio has fallen back to unusually low levels for the time.

Each of the past three years, there has been a similar strong consensus that has turned out to be completely wrong. I wonder if next year will bring a rare soft landing and an equally unusual consensus to be right. But even if it succeeds, the market gains from betting on something that almost everyone agrees will happen are unlikely to be large.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

CM Trade

As a world leading financial trading platform, CMtrade Provides comprehensive one-stop trading services and opportunities for traders.

[Products]

The platform provides over 32 kinds of popular financial products such as forex, precious metals, crude oil, indices, cryptocurrencies and more.

[System]

2 top trading systems CM Trade MT4 / CM Trade APP, powerful and easy to operate

[Service]

Comprehensive market news, professional market analysis, 7*24 hours online customer service

[Advantage]

Low cost, high leverage, flexible one-stop all day two-way trading.

[Authority]

Licensed and strictly regulated by authorities. Traders deposits are independently kept by the bank. Fast deposit and withdrawal. Fair, efficient and transparent trading environment.

Free Access
Daily Trading Strategy Download Now

CM Trade Mobile Application

Economics Calendar

Beware Wall Street's most crowded trade: A soft landing next year

Access to global trading markets anytime and anywhere