An analysis by the Goldman Sachs Group has revealed that hedge funds and other big investors managing around $4.8 trillion in assets have been betting on stocks that benefit from the Federal Reserve being able to pull off a soft landing and the US economy avoiding a recession.
Is the US Headed for a Recession?
The US Federal Reserve is on the fastest rate hiking cycle in more than 40 years. As reported, the central bank increased the rates by 75 points in a unanimous decision in early November during its 7th and penultimate FOMC meeting of 2022 — the fourth in a row, bringing interest rates to 4%.
Furthermore, The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, the three most widely-followed US indices, have experienced their worst stretch of losses in decades this year, making the outlook for markets exceptionally gloomy.
All of this, as well as the geopolitical tensions, has convinced many economists that a “soft landing” is not very likely. Back in May, some economists warned that the US economy could be heading for a recession next year. At the time, Mark Zandi, chief economist at Moody’s Analytics, said:
“Recession risks are high — uncomfortably high — and rising. For the economy to navigate through without suffering a downturn, we need some very deft policymaking from the Fed and a bit of luck.”
In late September, BlackRock analysts echoed the same point of view, saying that achieving the 2% inflation target would cost the US a recession that would wipe out 3 million jobs. They explained:
“We think quashing inflation that quickly amid constrained production capacity would take a recession – a roughly 2% hit to economic activity and 3 million more unemployed. We think the Fed is not only underestimating the recession needed but ignoring that it’s logically necessary.”
Stock markets experienced one of their worst crashes amid the pessimistic outlook. In mid-May, the Dow posted its eighth straight weekly loss, its longest weekly losing streak since 1923. At the time, the S&P and Nasdaq were down by more than 20% from their record high.
The Case for a Historic Soft Landing
Despite growing concern regarding an upcoming recession, some investors are ostensibly weighing down on the possibility of a historic “soft landing.” According to a recent report by the Wall Street Journal, a growing list of hedge funds and other big investors are becoming more confident in the Fed being able to avoid a recession.
As per the report, mutual funds and hedge funds managing around $4.8 trillion in assets have been investing in stocks that benefit from inflation slowing down, interest rates going down, and eventually, the Federal Reserve being able to pull off a soft landing.
More specifically, these big investors have larger-than-average positions in shares of industrial, materials, and energy companies. These three groups are directly correlated to changes in the economy, meaning that they will perform well if the US can avoid a deep and prolonged downturn.
According to the WSJ, several factors have contributed to the growing optimism. Firstly, the labor market has remained strong, with the US adding 528,000 jobs in July and the unemployment rate remaining at a historically low 3.7% last month.
Another positive point is that consumer spending is up, increasing a seasonally adjusted 0.8% in October from the prior month. More importantly, consumer prices rose 7.7% last month, compared to the previous CPI reading of 8.2%.
It is looking increasingly likely that the US will be spared “the typical scar tissue of a steep economic downturn,” Katie Nixon, chief investment officer for Northern Trust Wealth Management, reportedly said.
However, one remaining challenge is a red-hot labor market. In a speech last month, Federal Reserve Chair Jerome Powell said the biggest remaining barrier is the shortage of workers and that wages are still growing too quickly to tame inflation.
Meanwhile, the S&P slipped 0.73% to end its latest trading session on Friday at 3,934.38. The Dow Jones Industrial Average lost 0.90% to finish the session at 33,476.46. The Nasdaq Composite fell 0.70% to end at 11,004.62.
This article originally appeared on The Tokenist
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