Too far, too fast? Investors may have been over-bullish on economy
December’s whipsaw opening shows investors may be concerned November’s epic rallies went too far, too fast in anticipating a near-perfect soft landing for the economy.
Wall Street kicked off this week with losses for stocks and bonds in a sign that traders’ aggressive pricing for early, rapid Federal Reserve rate cuts in 2024 may have overshot.
“My gut says that the market has baked in slightly more than enough cuts for the strength of economic data for the U.S. right now,” said Amy Xie Patrick, head of income strategies at Pendal Group in Sydney.
The reversal underscores the risks that investors face as they double down on bets that slowing growth and inflation will force the Fed to execute a policy pivot. It’s a trade that stands to pay off handsomely if rate cuts materialize — or backfire spectacularly if U.S. policymakers opt to keep borrowing costs higher for longer.
The rate-cut wagers yielded solid gains in November. A Bloomberg gauge of Treasuries jumped 3.5%, its biggest monthly advance since 2008. The 9.1% surge in the MSCI global equity index rivaled the rallies seen in 2020 — when central banks were dishing out stimulus to revive their economies in the midst of the pandemic.
The euphoria was largely driven by a sea change in expectations for Fed policy moves. Traders now see about a 70% chance the US central bank will cut rates in the first quarter, and have priced in as many as five, quarter-point reductions by the end of 2024. At the start of last week, they saw less than a 20% chance of a March reduction, with only three cuts fully priced in for next year.
Concerns are growing that markets may be in technically overbought conditions and extreme bullish positioning risk leaving traders exposed to
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