Retail Investors Clash With Pros Over Best Stock Trade Before the Fed Rate Decision

(Bloomberg) — Ahead of this week’s Federal Reserve meeting — and in a year when many didn’t make the right calls — professional investors and do-it-yourselfers are sharply divided over the best way to position ahead of the central bank’s rate decision on Dec. 14.

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The top responses in the latest MLIV Pulse survey found that 37% of retail investors believed owning US stocks is the best trade ahead of the rate decision, while 40% of professional investors said it’s better to short them.

“There’s been a split between retail and institutional or professional investors for most of the year, and positioning by professionals has been much more bearish,” Art Hogan, chief market strategist at B. Riley Wealth, said by phone. “Institutional investors are likely talking their book more than they’re talking their intellectual honesty. If you look at net positioning, there’s a lot of professionals that are still offsides.”

Alec Young, chief investment strategist at MAPsignals, said that while “retail might have it right,” the professionals’ caution is warranted because consumer price index data will be released Tuesday, a day before the Federal Open Market Committee rate decision and both have driven big market moves.

“There’s a lot of concern — that’s what happens at the end of a bear market,” Young added. “People are too cautious. But generally speaking, the market does very well in the 12 months after inflation peaks.”

As part of its efforts to tamp down relentless inflation, the Fed is projected to raise rates by 50 basis points on Dec. 14 to a band of 4.25% to 4.5%. In that aftermath, 31% of 515 respondents agreed that stocks will be the biggest beneficiaries.

“If the Fed’s stance is slower, maybe longer but slower, I think people can live with that and that’s why stocks would go up,” Kim Forrest, founder and chief investment officer at Bokeh Capital Partners, said in an interview. “Retail investors are just looking at a phenomenon called the Santa Claus rally, and the professionals are looking at the economic data.”

B. Riley’s Hogan agreed: “The market is going to be positioned to respond positively to whatever the outcome is of the meeting.”

Professional investors said that, alongside stocks, high-grade corporate credit was most likely to gain after a 50-basis-point hike. Retail traders’ No. 2 pick was long-dated Treasuries, which have rallied sharply in recent weeks, pulling the 10-year yield below 3.5% last Wednesday.

“There has been extremely strong demand from investors for duration because Treasury yields had reached attractive levels,” Roger Hallam, global head of rates at Vanguard, said in an interview.

The rally has already driven the bond market to expensive yield levels. Still, Hallam added, “the Fed is not going to validate current market pricing at next week’s meeting, so we think there is an opportunity for yields to rise into the new year.”

Swap prices show that the Fed is expected to push policy toward a peak of 5% by the middle of next year, then decline to around 4.5% by the end of 2023. Back in September, Fed officials indicated a peak of 4.6% for the rate, though Chair Jerome Powell subsequently said that should be revised higher at the December meeting.

Almost two-thirds of investors surveyed backed the scenario of a mild US recession next year.

They’re “thinking about the state of the economy right now, that it’s not terrible and just forecasting that the rate increases are going to mildly affect the economy,” said Bokeh’s Forrest. “That’s a bad assertion but I understand. We don’t know that we’re really going to go into a recession, first of all, and we don’t really know that it’s going to be soft. I think this is a lot of wishful thinking.”

The most popular strategy call for 2023 among all respondents was Citigroup’s view that the US dollar will stay strong in the near term and then depreciate during the second half of the year. This jibes with the view of an overwhelming majority of both retail and professional respondents who expected that if the Fed stops hiking at mid-year and pauses, it will then cut rates.

Survey participants were also asked which investor has the best tweets. At the top of the list was Michael Burry, the hedge-fund manager who gained fame by betting against the housing market ahead of the 2008 crash (and who is also famous for deleting both his tweets and his Twitter account). Cathie Wood, whose flagship Ark Innovation ETF has slumped more than 60% this year, ranked lowest among the survey options.

To subscribe and see previous MLIV Pulse stories, click here. Tune in this Wednesday for our Instant Pulse survey right after the FOMC decision.

–With assistance from Airielle Lowe.