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Top Trades for the Rest of the Year

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(Bloomberg) — U.S. stocks will outperform the nation’s government and corporate bonds for the rest of this year as the Federal Reserve continues to cut interest rates, the latest Bloomberg Markets Live Plus poll showed.

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Exactly 60% of the 499 respondents said they expect US stocks to deliver the best returns in the fourth quarter. Outside the United States, 59% said they prefer emerging markets over developed markets. As they increase these bets, they avoid traditional calm outlets, such as Treasuries, the dollar and gold.

It’s a risk-on view that aligns with the bullish calls that emerged on Wall Street after the Federal Reserve cut its interest rate by half a point this month. The biggest rise in Chinese stocks since 2008 after Xi Jinping’s government stepped up economic stimulus also helped fuel the upside.

“The biggest challenge facing the U.S. economy is actually rising short-term interest rates,” said Yong-Yu Ma, chief investment officer at BMO Wealth Management. “We were already leaning towards risk assets and leaning towards US equities, and if there was a pullback, we would consider adding to that,” he said.

The Fed cut its benchmark interest rate from a two-decade high on September 18, and the average official forecast calls for an additional half a point of easing during its two remaining meetings in 2024, in November and December.

“Space for cutting”

The MLIV Pulse poll showed that 59% expect the Fed to deliver quarter-point cuts at each of these two rallies. Thirty-four percent expect larger cuts in that period, totaling three-quarters of a point or a full point. This is more in line with swap traders, who are pricing in a total of about three-quarters of a point of discounts by the end of the year.

Investors’ confidence in the Fed’s ability to engineer a soft landing has increased, putting the S&P 500 on track for gains in September — the gauge’s historically worst month — for the first time since 2019.

“The Fed has a lot of room to cut, as do many other central banks,” said Lindsay Rosner, head of multi-sector investing at Goldman Sachs Asset Management. “This creates a good backdrop for the US economy, in particular. This does not erase the tightness of valuations, but it makes them more justified.

When asked which trade would be best avoided for the rest of the year, 36% – the largest group – indicated buying oil. Crude oil fell on concern that rising production outside the OPEC+ alliance will create excess supply next year. The runner-up was buying Treasuries at 29%.

Treasury bonds are still on track to achieve gains for the fifth month in a row. While interest rate cuts could support bonds, there are many questions about fixed income given diverging views on how quickly the central bank can reduce borrowing costs, with the labor market proving resilient. Investors are particularly wary of longer-term Treasuries, given the risk of inflation rising again as the Fed eases.

What Bloomberg strategists say…

“Maturity premiums for longer-dated Treasuries are set to rise, while liquidity risks – which have already risen as the government continues to run huge fiscal deficits – are likely to deteriorate.”

– Simon White, Strategist at MLIV

The poll also showed limited enthusiasm for the US dollar, another traditional haven asset. 80% of respondents expect the dollar to end the year either roughly flat or down more than 1%. The Bloomberg Dollar Spot Index is up less than 1% year to date.

The MLIV Pulse survey was conducted September 23-27 between Bloomberg News and online readers around the world who chose to participate in the survey, and included portfolio managers, economists and individual investors. This week’s survey asks whether the worst is over for commercial real estate debt. Share your opinions with us here.

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