Reuters: How are investors positioning and reacting to news and expected news?

November 22, 2022

A possible Fed pivot might not be the magic economic cure that many hope for

Running Point and its chief investment officer, Michael Ashley Schulman, CFA, were quoted by Reuters in an article—by Chibuike Oguh, “World shares rise, U.S. Treasury yields fall ahead of Fed minutes”—regarding how and why equity and bond markets were reacting ahead of Federal Reserve commentary and the Thanksgiving holiday.

The article was also picked up by NasdaqToday (Singapore), Kumparan (Indonesia), and ABC News (Australia), amongst others.

This could be one of the better environments for long-short equity hedge funds

Stocks: Slowing leading economic indicators, strong inflation, and an aggressive Federal Reserve have been unkind to equities and bonds this year. A possible railroad strike that could wreak fresh havoc in supply chains is an additional near-term concern. We’ve seen technology, consumer discretionary, and energy stocks lead downside momentum while consumer staples lead to the upside; these are clear signs of some investors positioning for a downturn or recession.

Yield Curve: The shape of the yield curve sends a similar message; why else would one year T-Bills be the highest point of the yield curve at 4.76% and the 10-year Treasury be the low-point at 3.76%, lower than even the 3-month T-Bill at 4.17%? It is quite possible we are seeing a bear market stock price rally (which are known to be fast and furious) in conjunction with a hoped-for holiday run-up (and Santa Clause rally in late December), but it could all expire in early 2023 if earnings data weakens. A potential slow down or pivot in Fed interest rate increases won’t fix the economy, it may only stop making things worse. This uncertain environment could be one of the better ones for long-short equity hedge funds.

T-Bills: Short-term treasuries and T-Bills have been a good place to park cash. Investors need to understand their own short-term and long-term risk tolerances, because trying to time investment market bottoms during recessions may create additional angst and cause investors to miss out on upside.

Corporations: Business forecasting for the upcoming fiscal year is difficult as economic uncertainty is dampening corporate spending intentions across the board. Also, the possibility of a U.S. recession raises the probability of increased defaults. Much like climate change and unpredictable weather patterns, unforgiving high interest rates effect all industries and sectors, thus negating some of the benefits that usually come with diversification. That said though, most companies are in good financial shape with strong earnings and margins that provide a significant cushion before we start seeing red. In other words, reduced earnings and margins do not necessarily mean negative earnings and margins. Nonetheless, rising rates and weaker income statements will challenge overly leveraged private and public companies. Stress in the upcoming business cycle will be driven by unforgiving high interest rates as opposed to specific geographic or industry-related tremors.

Quoted article excerpt is below:

“We’re seeing technology, consumer discretionary and energy leading downside momentum while consumer staples stocks leading the upside, these are signs of investors positioning for a downturn,” said Michael Ashley Schulman, chief investment officer at Running Point Capital in Los Angeles, California.

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