Today we will take the entire Morning Briefing to discuss the results of last week’s “DataTrek Near Term Outlook Survey”. Thanks to all who took the time to complete it! A few background points to set the stage:
- We had a total of 610 responses.
- Most surveys were completed between August 8th (last Monday) and August 10th (Wednesday).
- There were a total of 12 investment-related questions, and each one required one (and only one) choice from a list of preselection options. The percentage of responses we present below may not add to 100 due to rounding.
- The vast majority (94 percent) of responses were from the DataTrek community, with 6 percent from social media.
With that, let’s talk about the results …
One question proved to be the fulcrum issue for the entire survey: “Do you think the S&P 500 has made its lows for the year? (June low 3,667)” This was the second question in the survey, and the breakdown of responses was:
- Yes: 61 percent
- No: 39 percent
Comment: given that the S&P has been rallying since the June 16th lows, and in fairly convincing fashion since July 16th, we were a bit surprised that the response split was essentially 60/40 and not more skewed to the “Yes” reply. We then pulled the response data for every other question in the survey for the “Yes” answers (373 respondents) and “No” answers (237 respondents). The differences ranged between notable/interesting and down right stark.
As we discuss the replies to the other 11 survey questions, we will bucket the analysis by “Yes” and “No” respondents with the labels “What the Bulls/Bears said”. The most common aggregate reply to each question is bolded.
Q1: Where do you think the S&P 500 will end the year (around 4,100 now)?
- Over 4,600: 6 percent
- 4,400 – 4,600: 17 pct
- 4,200 – 4,400: 24 pct
- 4,000 – 4,200: 18 pct
- 3,800 – 4,000: 16 pct
- 3,600 – 3,800: 12 pct
- Below 3,600: 8 pct
What the Bulls said: most (57 percent) thought the S&P would end the year somewhere between 4,200 (current levels, basically) and 4,600. Only 8 percent said the S&P could close above 4,600. Since we began the year at 4,779, this means even the vast majority of “Bulls” think 2022 will be a down year overall.
What the Bears said: 67 percent think the S&P will end the year below 4,000, with 3,600 – 3,800 being their most common estimate (28 pct of Bearish replies). The June S&P closing low was 3,667, not far off this modal estimate of Bearish respondents.
Comment: while the most common overall reply was 4,200 – 4,400, this level is really just the low end of the Bullish answers and the high end of the Bearish ones. At Friday’s close of 4,280, we are right in the middle of this range.
Q3: Which asset class do you think will perform BEST between now and year end? Answers listed by highest to lowest frequency of responses:
- US Large Caps (S&P 500): 27 percent
- NASDAQ Composite: 20 pct
- Cash: 17 pct
- US Small Caps (Russell 2000): 14 pct
- Gold: 10 pct
- 10-Year US Treasuries: 8 pct
- MSCI Emerging Markets Index: 3 pct
- MSCI EAFE (non-US developed economies) Index: 1 pct
What the Bulls said: this camp was responsible for 77-83 percent of the votes for US Large Caps, US Small Caps, and the NASDAQ Composite despite only being 61 percent of total survey responses. “Bullish” really means “I like US stocks”.
What the Bears said: their votes went Cash (33 percent of this cohort’s responses), Gold (17 percent) and 10-year Treasuries (14 percent).
Comment: Only 4 percent of survey respondents chose EAFE or Emerging Markets equities as their top pick for the rest of the year. Steering clear of non-US equities was the only investment viewpoint Bulls and Bears agreed upon in our survey.
Q4: Where do you think Fed Funds will end the year (currently 2.25 – 2.50 percent)?
- Above 4 percent: 3 percent
- 3.75 – 4.00 pct: 18 pct
- 3.50 – 3.75 pct: 34 pct
- 3.25 – 3.50 pct: 29 pct
- 3.00 – 3.25 pct: 14 pct
- Below 3.0 pct: 3 pct
What the Bulls said: this cohort skewed their answers to the lower end of the range, with 53 percent answering somewhere between “Below 3 pct” and “3.25 – 3.50 pct”.
What the Bears said: this group’s answers were tilted to the upper end of the range, with 66 percent of responses between “3.50 – 3.75 pct” and “+4 percent”.
Comment: the aggregate survey responses roughly mirror current Fed Funds Futures probabilities, which place 78 percent odds of policy rates ending the year between 3.25 – 3.5 percent (32 pct odds) and 3.50 – 3.75 percent (46 pct). Our survey had 63 percent of responses in this 50 basis point range.
Q5: Where do you think 10-Year Treasury yields will end the year (currently around 2.8 percent)?
- Above 3.5 percent: 9 percent
- 3.25 – 3.50 pct: 17 pct
- 3.00 – 3.25 pct: 33 pct
- 2.75 – 3.00 pct: 24 pct
- 2.50 – 2.75 pct: 10 pct
- 2.25 – 2.50 pct: 6 pct
- Below 2.25 pct: 1 pct
What the Bulls said: this group’s responses clustered in the middle of the range, with 74 percent of respondents choosing one of the options between “2.50 – 2.75 pct” and “3.00 – 3.25 pct”.
What the Bears said: this group was much more likely to believe 10-year rates would either end the year below 2.50 percent (10 pct of their votes) or above 3.0 percent (66 percent of their votes.
Comment: the schism between equity Bulls and Bears is, to some degree, explainable as a difference of opinion about long term Treasury yields. Bulls think we will stay somewhere around current levels (2.84 percent). Bears think yields either break higher or lower based, presumably, on either expectations of sustained high inflation or a near term recession.
Q6: Do you think Q2 2022 marked the peak in S&P 500 earnings for the current business cycle?
- Yes: 63 percent
- No: 37 pct
What the Bulls said: this group was almost evenly split, with 51/49 percent answering “Yes”/”No”. Put another way, 82 percent of total survey respondents answering “No” were from the “Bullish” camp.
What the Bears said: only 18 percent thought S&P earnings had more room to grow in the current business cycle.
Comment: Bulls are willing to entertain the idea that corporate earnings may have room to increase further in Q3/Q4 2022, and Bears are almost dead-certain they have peaked.
Q7: What do you think the headline CPI inflation rate will be in December 2022 (June’s reading was 9.1 percent)?
- Over 11 percent: 2 percent
- 9 – 11 pct: 7 pct
- 7 – 9 pct: 34 pct
- 5 – 7 pct: 48 pct
- 3 – 5 pct: 9 pct
- Below 3 pct: 0 pct (3 responses)
What the Bulls said: almost two thirds (63 percent) of this group think CPI inflation will be 7 percent or less by December.
What the Bears said: just over half (52 percent) think CPI inflation will be over 7 percent in December.
Comment: the Bull/Bear divide can also be explained as a difference in perspective about inflation’s trajectory over the next 4 CPI reports. Bulls tend to think December’s headline inflation reading will be 7 percent or less. That is an interesting number because last December’s inflation report was 6.8 percent (for November) and this was the last time US inflation was below 7 percent. Bears shade their views to the +7 percent inflation outcome at year end.
Q8: Which US large cap sector do you think will perform BEST over the rest of the year? Answers listed by highest to lowest frequency of responses:
- Technology: 29 percent
- Energy: 25 pct
- Health Care: 15 pct
- Consumer Staples: 7 pct
- Financials: 7 pct
- Utilities: 6 pct
- Communication Services: 3 pct
- Materials: 3 pct
- Industrials: 2 pct
- Consumer Discretionary: 2 pct
- Real Estate: 1 pct
What the Bulls said: this cohort was responsible for +75 percent of the responses in favor of Tech, Financials, Communication Services, Industrials and Consumer Discretionary. These are all either high beta or cyclical bets, so that makes sense.
What the Bears said: despite being only 39 percent of the survey, this group was +50 percent of the votes for Energy, Health Care, Consumer Staples, Utilities and Real Estate. We found it interesting that Energy was one of their favorites, but the others certainly fit a cautious view since they are defensive sectors.
Comment: even though Bears tilted towards Energy and Health Care, plenty of Bulls (48 – 49 percent) also named these as their favorite groups. If you are looking for names that appeal to both camps, these sectors fit that bill.
Q9: Which US Big Tech stock do you think will perform BEST over the rest of the year? Answers listed by greatest to least number of responses:
- Apple: 24 percent
- Microsoft: 21 pct
- Amazon: 19 pct
- Alphabet/Google: 13 pct
- Tesla: 10 pct
- Meta/Facebook: 7 pct
- NVIDIA: 6 pct
What the Bulls said: votes for Amazon, Tesla, Alphabet/Google and NVIDIA came mostly from this camp (64 – 79 percent of total votes).
What the Bears said: this group favored, unsurprisingly, the safer bets of Apple, Microsoft but also Meta/Facebook as perhaps a value “how much worse can it get?” trade into year end.
Comment: respondents’ views of overall market conditions reach all the way into their views of single stocks, a neat way of explaining why sector/stock correlations to the overall market remain higher than usual.
Q10: Where do you think WTI Crude will end the year (around $90/barrel recently)?
- Over $110/barrel: 10 percent
- $100 – $110/barrel: 20 pct
- $90 – $100/barrel: 29 pct
- $80 – $90/barrel: 28 pct
- $70 – $80/barrel: 12 pct
- Below $70/barrel: 2 pct
What the Bulls said: as with the question about 10-year Treasury yields, the camp that is more positive on equities believes oil prices will end 2022 somewhere in the middle of the wide range of possible responses offered in the survey. Between 64 – 73 percent of total responses for $80 – $100/barrel came from this group.
What the Bears said: just over half (52 percent) of total responses that oil would be over $100/barrel came from this cohort even though they represent 39 percent of all survey participants. They also represented half of the small number of total respondents who said they expect oil to be below $70/barrel at year end.
Comment: this fits with the difference of Bull/Bear opinions on year end inflation levels, namely that oil prices will either be stable (Bulls) or move significantly higher/lower from here (Bears).
Q11: Where do you see US unemployment ending the year (3.5 percent in July)?
- Over 4 percent: 13 percent
- 3.8 – 4.0 pct: 25 pct
- 3.6 – 3.8 pct: 37 pct
- 3.4 – 3.6 pct: 19 pct
- 3.2 – 3.4 pct: 5 pct
- Below 3.2 pct: 1 pct
What the Bulls said: this group was marginally more likely to believe unemployment would end the current year at 3.4 – 3.6 percent (66 pct of total respondents choosing that level) or 3.2 – 3.4 percent (73 pct).
What the Bears said: these respondents were more likely to believe that unemployment would end the year at +4 percent, representing 58 percent of the total responses for that outcome.
Comment: except for some Bear respondents’ concerns about +4 percent US joblessness at year end and a few Bulls who think it could decline to below 4 percent, the two groups are largely aligned in thinking unemployment will increase modestly by the end of 2022.
Q12: Which statement best characterizes your current investment perspective? Answers listed by highest to lowest frequency of responses:
- Neutral on both stocks and bonds: 30 percent
- Positive on stocks, negative on bonds: 25 pct
- Negative on both stocks and bonds: 18 pct
- Positive on stocks and bonds: 17 pct
- Positive on bonds, negative on stocks: 9 pct
What the Bulls said: this group shades to “Positive on stocks, negative on bonds”, with 87 percent of the aggregate vote for that option coming from this cohort.
What the Bears said: no surprise, but they dominate the “Negative on stock and bonds” and “Positive on bonds, negative on stocks” answers, at 77 percent of total responses for each.
Comment: only 30 percent of all respondents chose “Neutral on both stocks and bonds”, which says the majority have an opinion and are likely expressing it with their latest investment decisions.
That concludes the question-by-question review of the survey, so we will close with 3 takeaway observations:
#1: Even after a 7 week US equity rally off the June lows at the time of this survey, many investors (39 percent) remain concerned that significant downside risks remain. With less than 100 trading days left in the year (97 by our count), they still worry that the S&P 500 will make new lows before the year ends. Whether you agree with them or not, almost 40 percent of our respondents have this outcome as their base case. That view is anchored by the belief that the Fed will remain hawkish, inflation/energy prices will remain relatively high, and the US economy will either remain overheated or quickly slip into a recession.
#2: The Bulls have a narrow lead over Bears (61 percent), and their expectations require a very specific set of economic outcomes over the next 4 months, including the following: CPI headline inflation comes down by 1.5 points or more by year end. Unemployment remains stable, or only edges up slightly. Energy prices and long-term interest rates remain at or near current levels. The Fed moves by 25 or 50 basis points at the next 3 meetings.
#3: The Bull – Bear debate is therefore ultimately about volatility. Bulls expect it to remain low across the board, especially in terms of interest rates, commodity prices, inflation and labor market conditions. Bears look at events of the last year and say, essentially, “No way … There must be some more surprises waiting in the wings”. While our own investment perspective still tilts bullish, we absolutely understand the Bears’ concerns. With a CBOE VIX reading below 20 as of Friday (19.5 close), even bullish investors can rightly wonder if the market’s confidence in the predictability of future economic readings is not a bit too high.