Money Managers See Stocks Ending the Year Sharply Lower

Many money managers expect stocks to resume their slide in the second half of the year even if inflation cools and increases in interest rates moderate.  According to 1,700 respondents in the latest MLIV Pulse survey, the S&P 500 Index ($SPX) (SPY) is seen closing the year at 3,700, a modest decline from last Friday’s close of 3,912 but still down more than -22% for the year. 

After the selloff in the first half of this year, most money managers see another big rout in stocks unlikely as much of the pain is already priced in.  Concerns are mounting that Fed rate hikes will end up triggering an economic downturn as the Fed raises interest rates to tame inflation.  The consensus by money managers in the MLIV Pulse survey is for the 10-year T-note yield to finish 2022 at 3.5%. 

Tightening by the Fed and other central banks has roiled global stock markets this year, with the S&P 500 down -18% and the Nasdaq 100 ($IUXX) (QQQ) falling -26%.  Deutsche Bank AG said the doubling of the 10-year T-note yield this year is the most in more than two centuries of bond market data.  Geopolitical risks also weigh on investor sentiment, with Russia’s war in Ukraine driving up commodity prices.

Money managers in the survey say that while the rout in stocks may not be over, the bottom may not be far off.  The median projection is for the S&P 500 to close the year at 3,700 after first falling to 3,500.  There is optimism that inflation may have peaked, with most respondents expecting U.S. CPI to end the year at 6% even as crude oil stays at multi-year highs. However, the Pulse poll also suggests that a slowdown in the economy will currently push the U.S. unemployment rate up to 4.2% from 3.8%.

The MLIV Pulse survey shows that money managers are more dovish on the Fed than market consensus. The median view of respondents suggests a further 125 bp of Fed rate hikes this year, a full 50 bp less than market-implied odds last week.  However, respondents of the survey were divided on whether a global recession or fresh inflation surprises this year will undercut the economy, with stagflation predictions raging between 10% and 90%.

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