Yesterday, the market panicked after CPI rose 0.1% instead of falling 0.1%.
Investors’ reaction shows how the Fed remains pivotal for markets in 2022 and beyond. And this pessimism has practical implications, as asset managers are heavily underweight on equities. As growth improves and inflation falls, this can lead to sharp rebounds in equities. Only the Fed can spoil the party.
Why are investors underweight on equities?
Investors hold grim views on the economy – as grim in fact as 2008, judging by BofA’s Fund Manager Survey.
Their gloom was driven primarily by the bearish performance of all major asset classes in H1’2022 – including fixed income, usually a safe haven in economic hard times.
Why do I care?
The allocation of long-only “slow money” can be very important for the future direction of markets.
Asset allocators manage 100x more money than hedge funds and short-term traders, and their positioning can drive markets for quarters when it reaches extremes.
Currently investors are underweight equities in aggregate. And as growth rebounds and inflation cools off, the chances of a snap back in equities are considerable, like we’ve seen in the last few days.
‘Ware of the Fed
The Fed remains a key issue for market participants to ponder. With increasingly hawkish saber-rattling across all major central banks, policy makers might drive the economy into the ground in an excess of zeal.
At the cost of sounding like a broken record: evidence is mounting that Q4 markets will remain range bound.
If you are value- or yield-seeking, buying the dips can provide good entry points. And if you trade actively, it might make sense to fade the peaks.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.