Survey Results: Bulled Up On Low Rates

Today we have the results of our Q2 DataTrek Market Outlook Survey. First, a few background points on the survey itself:

  • We had a total of 146 responses, entered between April 1st and April 7th.
  • 90% of survey takers are current DataTrek readers, who are overwhelming in the investment business across the buyside, RIA/family office, sellside and venture capital communities.
  • 10% came from social media outreach (LinkedIn and Twitter).
  • We randomized potential responses wherever it made sense.
  • Response percentages listed below may not total to 100% due to rounding. Respondents were allowed only 1 reply to each query.

With that, here are the survey responses, present with: 1) the question asked, 2) the distribution of responses, and 3) our commentary:

#1: Which asset class do you think will perform the BEST over the remainder of 2019?

  • US stocks: 44%
  • Emerging Market stocks: 32%
  • Gold: 8%
  • Cash/T-bills: 7%
  • US long-term (10+ year maturity) Treasuries: 5%
  • EAFE (non-US developed economy) stocks: 4%

Comment: The results show a 2-horse “risk on” consensus for the rest of 2019 with US/EM stocks taking 76% of the vote. As compared to our survey from late January 2019, respondents are now more positive on US stocks; 36% chose this asset class to be this year’s biggest winner in our earlier survey versus 44% now. The marginal votes came from gold and long-term Treasuries/cash.

#2: Which asset class do you think will perform the WORST over the remainder of 2019?

  • US long-term (10+ year maturity) Treasuries: 27%
  • Cash/T-bills: 19%
  • Gold: 18%
  • EAFE (non-US developed economy) stocks: 15%
  • Emerging Market stocks: 14%
  • US stocks: 7%

Comment: the flip side of Question #1, our respondents are most negative on long dated Treasuries, cash and gold. As compared to our late January survey, gold bearishness is up the most (10 incremental points), followed by long-term Treasuries (4 incremental points).

#3: Thinking now about just US large cap stocks (S&P 500), which industry sector do you think will perform the BEST over the remainder of 2019?

  • Technology: 40%
  • Financials: 15%
  • Health Care: 10%
  • Energy: 8%
  • Consumer Discretionary: 5% (8 votes)
  • Utilities, Consumer Staples, Real Estate: 5% (7 votes) each
  • Industrials: 4%
  • Communication Services: 2%
  • Materials: 1%

Comment: the percentage of respondents citing Tech as their top group doubled from 20% to 40% as compared to our late January survey. That 20-pont increase came primarily from reduced optimism for Health Care (19% then, 10% now) and Financials (20% then, 15% now). Those groups have, of course, had a tough slog of late.

#4: What do you think will be the yield on the US 10-year Treasury note at the end of 2019?

  • Below 2.00%: 3% of respondents
  • Between 2.01% and 2.25%: 21%
  • Between 2.26% and 2.50%: 27%
  • Between 2.51% and 2.75%: 31%
  • Above 2.75%: 17%

Comment: when comparing these responses to those from late January 2019, it is clear that long-term rate expectations have reset dramatically lower. Back then, 68% thought the 10-year Treasury would end the year at-or-above 2.75%. Now, it is just 17%. Hold that thought, because we’ll come back to it at the end.

#5: Where do you think Fed Funds will end the year?

  • 50 basis points lower than today: 7%
  • 25 basis points lower than today: 21%
  • The same as today: 58%
  • 25 basis points higher than today: 12%
  • 50 basis points higher than today: 2%

Comment: while the modal response expects the status quo to continue, respondents’ bias is to expect an easier Fed in 2019 by a ratio of 2:1 (28% anticipate rate cuts, 14% are looking for increases).

The comparison to our late January survey – done AFTER Chair Powell’s January 4th change of policy comments and the January 30th FOMC meeting – is also notable. Back then, only 35% of respondents thought rates would end the year the same/lower. In this survey, 86% felt that was the case.

#6: When do you think the US and China will come to a meaningful agreement on trade?

  • During Q2: 34%
  • During Q3: 32%
  • During Q4: 12%
  • During 2020 or after: 23%

Comment: two thirds of respondents do not expect a US-China trade deal this quarter. Back in our late January survey, 51% thought a deal would be wrapped up in Q1 or Q2. Hope springs eternal, however, with respondents now clustering around expectations of a Q3 deal (32%), up from the earlier survey (13%).

#7: In your opinion, which of these is the most reliable predictor of an impending US recession?

  • Rising unemployment, reflected either in rising Initial Claims and/or unemployment rates: 32%
  • The spread between 2 and 10 year Treasury yields: 22%
  • Consumer/Business sentiment: 17%
  • The spread between Fed Funds and 10 year Treasury yields: 10%
  • An inversion in the yield curve, regardless of maturity: 10%
  • Rates of growth in house prices: 6%
  • Economic growth of non-US economies: 3%

Comment: now you know why US stocks aren’t too worried about the yield curve. We gave respondents 3 chances to fret over inversion, but those choices garnered well less than half (42%) of the votes. More fundamental indicators (labor/housing markets, non-US economies, confidence) all mattered more.

#8: What do you think are the odds of a US recession over the next 2 years?

  • Less than 20%: 16%
  • 21% to 40%: 28%
  • 41% to 60%: 29%
  • 61% to 80%: 17%
  • Better than 80%: 9%

Comment: not much conviction here that a US recession is likely any time soon, with just 26% of respondents putting the odds at +60%. That number is essentially unchanged from the late January survey (27%). Still, with 29% of answers putting recession odds at right around 50% (41% to 60%), that reading is higher than January’s 24%.

#9: In your opinion, which of these presents the GREATEST risk to US stocks over the balance of the year?

  • The US/China do not come to a meaningful trade agreement: 31%
  • US equity valuations are too high: 15%
  • A geopolitical shock: 14%
  • Slowing Chinese economic growth: 12%
  • The Federal Reserve keeps rates too high: 12%
  • A Eurozone recession: 7%
  • An Emerging Markets currency crisis: 5%
  • A disorderly Brexit: 3%

Comment: there’s always plenty to worry about, but US/China trade and equity valuations top this list at a combined 60% of respondents’ votes. On the bright side, our respondents seem to have confidence that the Fed will respond appropriately to whatever economic conditions develop. Or at least a Fed policy mistake is not at the top of their concerns…

Summing up, here’s how we think about these findings:

Respondents see a good investment environment for the rest of 2019. Equities will work better than cash/bonds/gold. US stocks will outperform EM or EAFE. US Large Cap Tech will do best of all. That is also a fairly exact description of what has happened so far in 2019, and the recent past always anchors near term expectations.

Our survey takers will likely need to see actual economic deterioration before they change their bullish ways; a wonky yield curve alone won’t do it. As long as labor/housing markets and business/consumer confidence remains strong, they can afford to wait on a US/China trade agreement. And if the Fed needs to cut rates, there is some confidence they will.

If you’re thinking, “Sentiment is too bullish” we hear you, but remember Question #4 about long-term rate expectations… Those have collapsed in just 2 months, from 88% of respondents thinking 10-year yields would end the year over 2.75% to just 17% today. As a reminder, those started the year at 2.69% and sit at 2.50% today.

That shift in rate sentiment is the lynchpin for global equities. To go against “the crowd” (what this survey measures, after all) you need to have a variant perspective on either corporate profit growth and/or the lower-rates-for-longer global bond market narrative.

At DataTrek we’re only worried about the former just now. We expect negative earnings comps for Q1 and management guidance for rest-of-year 2019 profits to create some volatility over the remainder of the month. Given the benign rate environment, however, that’s not enough to make us bearish.

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