As Binary As It Gets: Bulls, Bears and the Pivot

It’s a binary world. To an extreme extent, opinions on the market are divided, and they are split on one key issue: Will the Fed have to “pivot” toward easier monetary policy in the next few months, or won’t it? This question vitiates investment decisions in almost any asset you care to mention. Everywhere you look, choices are contingent on that central call of whether the Fed has to reverse. Meanwhile, prices of most assets are set at some mid-point, based on a set of conditions nobody expects.

Absolute Strategy Research Ltd.’s latest quarterly survey of global asset managers, managing $4.3 trillion, suggests “bulls” and “bears” are almost exactly in balance. Overall, optimism is low. The survey’s composite optimism indicator, based on answers to several questions about the economy and markets, is just above 50% and barely higher than it was three months ago:

But this conceals deep differences. First, although there is much pessimism or bearishness about the economy, that doesn’t translate into similar negativity toward markets. To quote Absolute Strategy’s David Bowers:

There still seems to be something of a disconnect between respondents’ macro assumptions and the readthrough to financial markets. Investors expect the world to be in recession a year from now (probability 62%); the US unemployment rate to be higher (probability 76%); and Global monetary conditions to be tighter (probability 71%). These parameters do not spell soft landing.

The contradiction is resolved to an extent by a belief that bad news is good — that the economy will be slow enough to push the Fed into reversing course early and starting to cut rates. In such circumstances, markets can prosper despite a poor economy. Those who feel that way make a narrow majority in what Bowers calls a “bimodal” or tribal division.