Some prominent Wall Street figures have warned recently that the Federal Reserve’s rate hikes could drive the US economy into a recession.
But that’s not what stock-market investors are pricing in right now, according to analysts from Deutsche Bank AG.
Strategists Parag Thatte and Binky Chadha looked at a number of indicators including short interest, call volumes, sentiment and fund flows, among others, and found that many suggest investors are broadly expecting the Fed to manage its goal -- a so-called soft landing that doesn’t destroy growth.
“While a slowdown in growth looks priced in across the board,” they wrote, “very few are down to recession levels.” The team sees the S&P 500 ending the year at 4,750, roughly 15% above where it was late Monday.
Short interest, a signal of bets on stock-price declines, is near record lows, the pair wrote in a note dated June 3. In fact, overall short interest compared with the stock market’s capitalization hasn’t budged much from its multi-year downward trend and is sitting near 20-year lows.
Meanwhile, the volume of trading in call options has tumbled sharply from the elevated levels of the pandemic boom, when bullishness was cresting. But they said the drop, relative to put-option trading, doesn’t show expectations of a contraction. “The put/call ratio is now in line with a growth slowdown (ISM in the low 50s) but not a recession,” they said.
Not that professionals can exactly agree on what’s ahead for the economy.
Many traders were spooked last week when a parade of chief executives came out with dire outlooks, including JPMorgan Chase & Co.’s Jamie Dimon, who warned of an economic “hurricane.” Other bank executives voiced similar views.
Yet strategists at those banks have not all agreed, underscoring the high level of economic uncertainty.
Economists at Goldman Sachs Group Inc., meanwhile, say the US economy is still on a narrow path to a soft landing.
Deutsche Bank’s analysts also looked at equity-fund flows, which have slowed from the record pace notched last year but have not seen sustained outflows yet. In fact, over the last three months, such funds have recorded aggregate inflows of more than $25 billion. At the same time, household allocations to stocks remain elevated. And the pace of buyback announcements continues to be strong, running at more than $300 billion in the last three months, the strategists said.
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