Equity investors are diverting money from consumer stocks that are likely to fare badly in a recession, indicating that market players are not fully convinced an economic downturn has been avoided.
Markets’ strong rebound this year—with the Standard & Poor’s 500 index up 19 percent and the NASDAQ 36 percent—“hides the fact that many active investors are still cautiously positioned,” the Financial Times noted.
“There’s a complete lack of conviction around a cyclical recovery,” strategist Savita Subramanian at Bank of America (BoA) told the FT. “The only demand we’re seeing is for growth themes like artificial intelligence.”
Hedge funds’ exposure to cyclical stocks compared to positions in stocks that would weather hard times has reached its lowest since 2011 during the Great Recession, BoA found.
The so-called “Magnificent Seven”—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—account for two-thirds of NASDAQ’s growth so far this year, the FT said.
Much of the market’s strength this year is due to that kind of selective positioning with the possibility of a recession in mind, the FT added.
“A lot of the change [in positioning] recently has been reluctant,” Parag Thatte, a Deutsche Bank strategist, said in an FT interview. As select stocks rocketed up, “people have been dragged” into the market “rather than wanting to go along with it.”
TREND FORECAST: We maintain our forecast that following the summer vacation, U.S. consumers, which are putting their money into services such as travel, restaurants, hotels, etc., will be buying fewer products. And, the inflation that they have been hit with is lasting, regardless what the latest inflation numbers show.
For example, the cost for new autos, insurance payments across the spectrum, homes, rentals, college tuition, etc., will move higher and/or only move a bit lower. It should also be noted, as we have, that major companies like Unilever, Pepsi, Coke, etc., who have raised their prices will not bring them down.
The point being is that it costs more to buy less, which will lower GDP growth—of which nearly 70 percent depends on consumer spending. And the higher interest rates go, so too will credit card debt and the cost of loans across the spectrum… which will move the nation into Dragflation: Declining economic growth and rising inflation.