There’s one game in town for investors betting on a soft landing
Fed cuts. Lots of ‘em.
Investors are betting big on a soft landing and there’s one reason why.
Bank of America’s closely-followed monthly fund manager survey shows that the recent bout of market volatility didn’t cause investors to radically re-evaluate the likely path for economic activity in the coming year.
In fact, consensus is coalescing on a soft landing, with over three-quarters of respondents calling that the most likely outcome for the global economy in the next 12 months.
A “soft landing” is an environment in which growth has moderated but is still positive and inflation has cooled back to near the central bank’s target.
The share of investors expecting that benign outcome is up from 68% in July, though it should be noted that this increase comes fully from a 10 percentage-point drop in those who expect “no landing” (that is, solid growth and stubbornly high inflation) and was accompanied by a modest uptick in those expecting a “hard landing” (shorthand for a recession).
“‘Soft landing’ economic conviction [is] driven by expectations for lower rates,” write strategists led by Michael Hartnett. “93% of fund manager survey investors expect short-term rates to be lower in 12 months’ time, highest in the past 24 years.”
Fund managers with over half a trillion in assets under management were surveyed by Bank of America from August 2nd to 8th. That period started with a soft July non-farm payrolls report, included sharp retreats across global markets and a spike in volatility, and ended with the best day for the S&P 500 since November 2022.
Investors seem to be buying into what Peter Williams, economist at 22V Research, told us before the last Federal Reserve meeting in late July: “There's nothing wrong with this economy that lower rates for a while, if they're really needed, can't fix."
What’s changed is that investors are more confident that this easing will be delivered, and that the Fed will simply have to do more to protect the expansion.
“Core optimism of a ‘soft landing’ [is] unchanged, but investors now expect a greater degree of Fed policy easing in the next 12 months will be required to achieve this outcome,” added Hartnett.
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