From underneath a tree we watch the sky

article feature image

Ahead of Nvidia results, the minutes of the last Fed meeting and the latest UK CPI report, the S&P hit another record high. In a speech in Ireland, Christine Lagard appeared to add fuel to the expectation that the ECB would cut in June. Mike Wilson, Morgan Stanley’s chief equity strategist, announced a volte-face yesterday, making all sorts of financial headlines as he announced a throwing in of the bear market towel. His target for the year-end was 4600, but it’s now 5400 for the S&P 500. To be fair, he did not entirely throw the towel in as much as he may have done, as he still believes the US recession risks are not correctly priced in, but he seems happier to climb aboard the bull case for now, at least. He is not alone, as most of the leading bank strategists have been chasing their tails when it comes to the S&P 500 year-end targets; the average target still remains below where the S&P 500 currently trades.

Another whole debate concerns whether good economists and strategists are worth their salt when it comes to predicting the direction of markets. One podcast caught my ear this week. Bank of America’s Savita Subramanian, managing director and head of US equity and quantitative strategy at Bank of America Corp, revealed her most reliable equity sentiment indicator. Ms  Subramanian, after many years of studying various sentiment indicators, discovered that the most reliable one is taking the average of where all investment allocators decided the correct equity allocation was, and if you did the opposite of what they recommended, you would do pretty well. When the investment community goes bullish, it’s time to get bearish, and vice versa was the message. It’s probably no real surprise to anyone there, but it is apparently reinforced by Ms Subramanian. So the news that one perma bear decides, the pain barrier swimming against the current tide, has decided to climb aboard the bull train draws headlines and raises questions about whether investor sentiment, as Mr Buffet describes, is heading to greed. Sentiment no doubt feels on the side of heading towards greed; is it there yet? Not so sure, but getting closer.

Back to the macro stuff and what will be making headlines in the UK, at least today, the latest UK inflation data has come in pretty much as expected. Headline UK inflation fell to 2.3% year over year, slightly higher than some forecasts of 2.1%, but still getting ever closer to the Bank’s 2% target. The core removing food and energy impact was slightly hotter than expected at 3.9%. Producer or factory gate prices came in roughly as expected as well. Is this enough to persuade the Bank of England to cut rates in June? The answer is probably that if they are of the mind to do it already, this news probably won’t derail that view. The Bank will soon face the same dilemma the Fed has; the closer we get to an election, the more they will want to stay passive.