Trading On margin

Stock bulls ‘almost gone’ as investors have ‘low’ confidence in the Fed, RBC poll finds

Investors optimistic about U.S. stocks over the next six months to a year have “almost disappeared” as the Federal Reserve begins to tighten monetary policy in the face of high inflation, according to RBC Capital Markets.

“For the first time since mid-2019, bears outnumbered bulls in our” first-quarter survey of institutional equity investors in the last four days of March, wrote RBC analysts led by Lori Calvasina, head of US equity strategy, in a search. Watch out Tuesday. The share of bullish opinions in the stock market has fallen to its lowest level since RBC began conducting the survey in early 2018.

RBC CAPITAL MARKETS REPORT DATED APRIL 5, 2022


While the U.S. stock market has already at least partly “prepared for a lot of bad news,” downside risks include a widening Russian-Ukrainian war and the potential for a recession, according to the report. Meanwhile, US equity investors are seeing “high valuations”, anticipating shrinking corporate profit margins and “having little confidence in the Fed”, according to the RBC survey.

“Confidence in the Fed is low but there is disagreement over what type of policy error will emerge,” RBC analysts said. While the largest percentage of investors believe the U.S. central bank will tighten monetary policy too much, a significant portion believe the Fed will tighten too little, according to the survey.

RBC CAPITAL MARKETS REPORT DATED APRIL 5, 2022


Many investors fear the Fed is raising interest rates too quickly, tipping the U.S. economy into recession by excessively tightening monetary policy as it aims to tackle high inflation.

“Voices from the investment community calling for a recession in the United States have been strong, but opinions on the chances of a recession among our survey respondents are more mixed,” RBC analysts said. Investors are “divided” on their expectations of a possible US recession in 2022 or 2023.

RBC CAPITAL MARKETS REPORT DATED APRIL 5, 2022


When it comes to positioning preferences, investors surveyed had “a decidedly cautious bias,” RBC analysts said. Most expect high-quality, large-cap and US stocks to outperform, they said, while their outlook for defensive stocks, Canada, healthcare, large-caps, US, commodity sectors and growth style bets improved the most.

Read: Inverted yield curve poses ‘new risk’ for small-cap stocks, BofA warns

When it comes to the “hot economic topics” weighing on their view of the U.S. economy and stock market over the next six to 12 months, investors are most worried about the recent spike in gasoline prices and monetary tightening by the Fed, according to the survey, followed by the Russian-Ukrainian war, the recent spike in mortgage rates and the flattening and inversion of the Treasury market yield curve.

Americans paid more at the gas pump as oil prices soared above $100 a barrel during the Russian-Ukrainian war. Gas prices in the United States averaged $4.176 a gallon on Tuesday, down from an average of $2.873 a year ago, according to AAA Gas Prices.

Read: Oil prices ‘kingpin’ of markets as Russia wages war on Ukraine, says CIO Bob Doll

In the US Treasury market, 2-year yields have recently risen above 10-year yields, an inversion of that part of the yield curve that has caught investors’ attention because it historically precedes a recession. Those yields weren’t reversed on Tuesday afternoon, however.

The yield of the 10-year Treasury note TMUBMUSD10Y,
2.560%
was trading around 2.55% on Tuesday afternoon, while the yield on the 2-year Treasury note TMUBMUSD02Y,
2.509%
about 2.51%, according to FactSet data, at last check.

In the US stock market, the S&P 500 SPX,
-0.85%
was trading around 0.6% lower on Tuesday afternoon and was down more than 4% so far this year, according to FactSet data.

Investors surveyed by RBC showed heightened concern about shrinking corporate profit margins over the next six to 12 months.

“Margin fears are at survey highs while valuation concerns are a bit below 2020-21 extremes,” RBC analysts said. “The conservative margin outlook seen in our survey suggests to us that buyers’ earnings expectations are likely more pessimistic than the bottom-up consensus forecasts on the sell side.”