We are now only 24 few hours away from finding out what the Federal Open Market Committee will do with interest rates. The latest Merrill Lynch fund manager survey indicates there are signs that sentiment amongst fund managers is reaching levels of bearishness we saw in 2008. We noted at the start of the week how much money has flowed out of equities in the past few weeks. Equity allocations have fallen to their lowest levels for 3 years; only 17% of fund managers are overweight equities relative to 41% in August. This would suggest that the fund managers are preparing themselves for an economic recession.
Few fund managers now appear to want the Federal Reserve to move on rates when tonight's announcement is made. Markets may be preparing themselves for bad news either way, if they don't move investors will worry about the economy, if they do move the Fed risk a policy mistake. When one studies the arguments, there seems to be many conflicting views as to what the outlook is for the global economy.
UBS, in a macro research report, believe that credit impulses (change in credit growth) are improving in Europe suggesting that there is upside risk to euro area growth. Citi in their August strategy report lowered growth forecasts for many economies, and believe risks lie further to 2016 growth forecasts. At present they forecast the global economy would grow at 2.7% this year (unchanged) and 3.1% next, down from 3.3%. They have now downgraded global growth forecasts for the 3rd time in a row for 2016. Their central case is for an economic recession in the second half of 2016, caused by weaker growth in China.
This uncertainty on global growth, caused by the worries over Chinese growth, the impact of the Greek troubles, and the impact of a US rate rise has led to fund managers deciding to sell and wait to see if worst fears are realised.
H1 earnings were supportive for equities; the companies in the S&P 500 beat expectations by 5% overall. In Europe, the earnings season likewise beat expectations and valuations are now more in line with historic levels.
Sentiment is bearish, that often gives reasons for hope. Since 2009 it’s been right to buy the dips, recently it's been right to sell the rallies. A lot appears to pin on the expectations of the Federal Reserve later tonight. The outcome may not be the trigger that the market will need, and the comments Janet Yellen makes that accompany the rate announcement may have more impact that the decision alone. No matter what happens investors may want wait to see how the next earnings season pans out to decide whether it is time to go back into the equity market again.