(Bloomberg) — Optimism about imminent rate cuts is stirring animal spirits — and unease — in equal measure at the end of a turbulent quarter in markets.
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Prominent money managers have stopped chasing the latest stock rally, reasoning that expectations for easier Federal Reserve monetary policy are overblown with inflation still running hot. Should any rate cuts come, they would be intended to halt an economic downturn that also would bode poorly for equity returns, their thinking goes.
Barclays Wealth Management just closed out an overweight position on developed market stocks two weeks after initiating it. Legal & General, which manages $1.4 trillion, has cut its equity exposure down to the biggest underweight since the pandemic, concluding that the hit from aggressive tightening will continue to play out on the US economy for months to come. After the bank turmoil this month, asset managers shifted their stock exposure from close to neutral to a level halfway toward historically low underweight measures, according to Deutsche Bank AG.
“Market-implied estimates may be exaggerating rate-cut potential before year-end,” said William Hobbs, chief investment officer at Barclays Wealth Management. He favors defensive positioning.
Their caution stands against a 20% advance in the tech-heavy Nasdaq 100 during the first three months of this year — its best quarterly gain since 2020. Speculative fervor has also boosted the price of Bitcoin by more than 70%.
Markets determined to leave worries about banking sector contagion behind have put falling bond yields and rosy reads of a looser Fed balance sheet in their sights. It’s a view that directly contrasts with the latest messaging from Federal Reserve officials.
Boston Fed President Susan Collins Friday said that more needs to done to bring inflation down, while Fed Chair Jerome Powell has insisted that officials don’t anticipate cutting rates any time soon.
Markets have priced in a sanguine scenario where cooling inflation triggers 60 basis points of rate cuts by the end of…