Today we will combine our Markets, Data and Disruption sections into one discussion of our recent 2H 2020 Investor Survey. Thanks to all who participated! A few background notes:
- 341 respondents completed our survey
- All questions were “choose one” (and only one) possible response
- 96% of respondents were DataTrek readers (4%, 12 responses, from social)
- The survey was live from last Monday (the 22nd) evening to Sunday (today) morning. Most responses came between Monday – Thursday.
Here are the individual questions, responses (most popular bolded where appropriate), and our take on each:
#1: Where do you think the S&P 500 will end the year?
- Up over 10% from current levels: 20%
- +5% to +10% from current levels: 21% (most popular by just 2 votes)
- Within 5% up or down from current levels: 21%
- -5% to -10% from current levels: 18%
- Down more than 10% from current levels: 19%
Our thoughts: we’ve never seen or done an investor survey over our many years in the business when every option from “really bad” (down +10% from here) to “really good” (+10%) got basically the same number of votes, and we’re only talking about the next 6 months. There was a difference of just 10 votes (3% of the total) between the most popular response (+5% to 10%, 73 votes) and the least popular (down 5% to 10%, 63 votes).
The bottom line is that we’re in a conviction-less market, at least as measured by this survey. We get it: so much about the future is still unknown and, to some degree, unknowable because of the economic impact of containing COVID-19. Our take has been that corporate profits are more knowable than economic conditions and equities should continue to rally after a several-week pause. But our survey results show many investors remain wary.
#2: Which asset class do you think will perform the best over the rest of 2020?
- US Large Cap Stocks (S&P 500): 38%
- Gold: 29%
- US Small Cap Stocks (Russell 2000): 11%
- Emerging Economy Stocks (MSCI EM Index): 7%
- Cash: 7%
- Developed Economy non-US Stocks (MSCI EAFE): 4%
- US 10-Year Treasury Note: 4%
Our thoughts: you can tell this story either as “investors like US large caps over the alternatives” or “almost 2/3rds of respondents don’t like the S&P 500”, either of which fits with the uncertainty highlighted by Question #1.
The real story is that “Gold got the silver” by taking second place at 29%. We do like gold here, as we mention when we do money flows reviews.
The other remarkable points here: typical early-cycle plays like US small caps and Emerging Markets didn’t even get 20% of the votes and EAFE was further back in the pack despite Europe and Japan doing a better job at containing COVID-19 thus far than the US.
#3: Which US large cap industry group do you think will do the best over the rest of the year?
- Technology: 52%
- Health Care: 12%
- Financials: 7%
- Consumer Staples: 6%
- Energy: 5%
- Consumer Discretionary: 4%
- Communication Services: 3%
- Utilities: 2%
- Industrials: 2%
- Real Estate: 1%
- Materials: 1%
Our thoughts: the big takeaway here is that even though there was no consensus on market direction (Question #1), the majority of respondents chose Technology to outperform. That goes some of the way to explaining the Teflon-like price performance of the sector, to be sure. But even though we like Technology here, the fact that it is overwhelming the favorite group is obviously not an investment positive.
#4: Do you think the Federal Reserve will implement a negative interest policy in the next 18 months?
- No: 77%
- Yes: 16%
- No opinion: 7%
Our thoughts: this question generated the largest consensus among the survey’s respondents. We think they are right but still keep a weather eye on Fed Funds Futures. Those, for what it’s worth, ARE pricing in some chance of negative rates from June 2021 to June 2022. We’ll have more on that in tomorrow’s note.
#5: What do you think the US unemployment rate will be in December 2020?
- Over 20%: 2%
- Between 15% and 20%: 16%
- Between 10% and 15%: 50%
- Between 5% and 10%: 31%
- Below 5%: 1%
Our thoughts: we read this as “68% of respondents think unemployment will be +10% at the end of the year and most (50%) think joblessness will look a lot like today’s 14.7%”. While we did not ask a question about further fiscal stimulus, the response here along with the evenness of Question #1’s responses tell us that most survey takers fully expect more US government relief in the coming months. Without that, there’s no way to justify anything other than a very bearish outlook in our view.
#6: Which country/geographic region do you believe will have the best economic growth between now and the end of 2020?
- United States: 40%
- China: 29%
- Asia ex China/Japan: 16%
- Eurozone: 7%
- Japan: 4%
- Africa: 2%
- Latin America: 2%
- United Kingdom: 1%
Our thoughts: the answers here seem to indicate that investors believe fiscal spending and monetary stimulus can do more to spur a local economy than containing COVID-19. The relative health of each region’s banking system may also be playing a role here. As we looked through the Fed’s US bank stress test results Thursday night, we wondered how Chinese, European and Japanese banks might look if analyzed through the same lens. One doubts they would fare as well, especially in the Fed’s “W” scenario, as US lending institutions (which in aggregate are right on the line themselves in that outcome).
#7: Where do you think the US 10-year Treasury yield will be at the end of 2020?
- Below 0%: 2%
- Between 0.0% and 0.5%: 36%
- Between 0.5% and 1.0%: 48%
- Between 1.0% and 1.5%: 13%
- Over 1.5%: 1%
Our thoughts: most (84%) respondents think 10-years will trade between 0.0% and 1.0%, which is the highest percentage reading for any 2-answer combination in this survey. Given the Fed’s desire to control long-term rates, that level of conviction sounds right to us.
#8: Is your personal/professional allocation to cash higher right now than at the start of the year?
- Yes: 62%
- No: 38%
Our thoughts: we put this question in the survey as a behavioral benchmarking question so you could see how your marginal portfolio positioning compares to other institutional investors. For what it’s worth, we thought the results would be more like 80% “Yes”.
#9: Which letter/shape best describes your expectations for a US economic recovery?
- “W” – choppy growth/contraction this year and next: 36%
- “Nike swoosh” – slow steady growth this year and next: 25%
- “U” – slower recovery this year, strong growth next: 23%
- “V” – relatively sharp recovery this year and next: 8%
- “L” – little/no growth this year and next: 8%
Our thoughts: we see these answers as going a long way to explaining the lack of investment conviction in question #1, because “W” and “U” votes combine to 61% of responses. The “swoosh” is only a modestly better outcome because you won’t know it’s a swoosh and not a “W” for a quarter or two. Add up all three shapes (W, V and swoosh) and you get 86% of everyone who took our survey.
#10: Do you believe US stocks will “retest the lows” (decline to/approach 2,237 on the S&P 500) this year?
- No: 71%
- Yes: 29%
Our thoughts: this was another high conviction call on the part of our survey takers. We agree with this sentiment and would add one thought. If we do retest it will be because markets have lost hope that fiscal and monetary stimulus can fill the economic hole left by the COVID Crisis. In that scenario “where’s the S&P trading?” will be the least of America’s problems.
#11: Who do you think will win the 2020 US Presidential election?
- Joe Biden: 48%
- Donald Trump: 43%
- No opinion/other: 10%
Our thoughts: we wondered how much the answer to this question might be informing our respondents’ general market view (Question #1). Here is the differential in answers between those who responded that Biden would win versus those who believe Trump will win:
- Respondents who said they believed Trump would win were twice as likely (30% vs. 15%) to think US equities would rally by double digits into year end. They were also more likely to think US stocks would rally by 5% to 10% (26% of Trump-wins predictors vs. 17% for Biden-wins predictors)
- Respondents who saw US stocks treading water through the rest of 2020 (+/- 5%) were equally likely to think Trump or Biden will win.
- Respondents who thought US stocks will fall by 5% or more were more than twice as likely to say they believed Biden would win the Presidency.
The bottom line is that respondents who think Biden will win in November have a much more negative view on US equities than those who believe President Trump will be re-elected.
#12: Who do you think will control the US House and Senate next year?
- Democratic House, Republican Senate: 48%
- Dem House, Dem Senate: 35%
- Rep House, Rep Senate: 9%
- Rep House, Dem Senate: 7%
Our thoughts: building on our analysis from the prior point, we screened for surveys where respondents both thought Biden will win AND the Democrats will sweep House and Senate. The results:
- There was no difference in terms of believing the S&P 500 would rise by +10% between now and year-end between those respondents who thought the Democrats will sweep White House and Congress (20%) and our entire survey (20%).
- At the other end of the rest-of-year return spectrum, those who believed the Democrats will take White House and Congress were only slightly more likely to believe the S&P 500 would end the year down more than 10% from here (24% of respondents versus 19% for all survey takers).
Bottom line: it may seem strange to see respondents who expect an all-Democratic Party Washington in 2021 pretty neutral on US stocks (rather than bearish), but history says a wait-and-see approach is the right one. As we outlined last week, market history back to World War II shows that the S&P 500 does better when one party (any party…) has complete control. The “gridlock is good” idea worked fine when it was Ronald Reagan and Tip O’Neill; we’re not so sure the current/future versions of these figures will be able to work together as well.
Summing up: thanks again to all who took our survey, and we hope the results outlined today give you a fresh perspective on how investors are thinking about the road ahead.