Wall Street’s ‘Foolish’ 2024 Trade Is Betting on Early Fed Rate Cuts

(Bloomberg) — The latest warning for investors unleashing dovish monetary wagers across the board: Two thirds of Bloomberg Markets Live Pulse respondents said that betting the Federal Reserve will loosen monetary policy early is the “most foolish” among popular trades heading into 2024.

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Even as the S&P 500 closed Friday at an all-time high, money managers and analysts are contending with data that signals US economic resilience and Fed officials who’ve pushed back against reducing interest rates too soon.

The results are an indication of rising anxiety on Wall Street that the bulls — who’ve been emboldened by speculation surrounding a dovish Fed pivot — are going too far. Already, traders who ended 2023 with an optimistic forecast of six rate cuts for this year have pared down that wager to five. They’re also less certain that policymakers will kick off their monetary easing cycle in March, as was nearly priced in during the frenetic rally of late 2023.

To Janet Mui, head of market analysis at RBC Brewin Dolphin, the re-acceleration of inflation in some major economies and resilience in US employment data result in an important challenge for the market’s interest-rate expectations. “The early start and number of rate hikes priced in was incompatible with the soft-landing view,” she said.

San Francisco Fed President Mary Daly on Friday, meanwhile, said it’s “premature” to think rate reductions are around the corner, noting she needs to see more evidence that inflation is on a consistent trajectory back to 2% before easing policy.

More than two thirds of the MLIV Pulse survey respondents said big gains for global stocks at the end of last year now look like a bad omen — and evidence that market participants became too optimistic too fast. Positioning and sentiment rapidly shifted from risk-off to risk-on at the end of 2023 as investors bid up everything from small-cap stocks to junk bonds on hopes of rate reductions.

Now, after a mixed start to 2024, they are forced to decide between enjoying the good times or reigning in optimism before they get burned. One sign of that conundrum: Investors who responded to the survey are less bullish on stocks than they were in November, even as they still prefer them to bonds.

Of course, a majority of those surveyed agreed that January is a poor indicator of what the rest of the year will bring. Less than a tenth of respondents allocate risk behind year-ahead trades in December or January, and about a third said year-ahead trades are stupid.

One asset that doesn’t appear to have much momentum: Bitcoin. More than two thirds of respondents said they plan to keep their exposure unchanged over the next 12 months, even after the first US exchange-traded funds investing directly in the largest digital currency finally went live this month.

After a double-digit stock rally led by megacaps in 2023, investors are looking for cheaper deals. Going long on value stocks over their growth counterparts is the preferred wager for 44% of market participants.

“The stock market is going to have a much tougher time maintaining today’s high valuation levels,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Too many investors were equating the end of rate hikes and the beginning of rate cuts with a return to era of free money.”

The MLIV Pulse survey is conducted weekly among Bloomberg readers on the terminal and online by Bloomberg’s Markets Live team, which also runs the MLIV blog. This week, the survey focuses on the housing market. Will the price of your house go up this year? Share your views.

This story was produced with the assistance of Bloomberg Automation.

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