New York: The US Federal Reserve has driven most stock market bears into hibernation. From UBS AG to Deutsche Bank AG and Citigroup Inc., Wall Street strategists are the most bullish they’ve been since 2000 after the US housing slump erased $5.6 trillion (Rs223 trillion) from the global equity markets and prompted the Fed to cut interest rates.
Steady move: Wall Street strategists are the most bullish after the US housing slump erased $5.6 trillion from the global equity markets and prompted the Federal Reserve to cut interest rates.
Wells Capital Management and MFS Investment Management, which together oversee $375 billion in assets, are adding or looking to buy shares of banks, retailers and technology companies on expectations that lower borrowing costs and expanding economies across Europe and Asia will spur profit growth.
“You couldn’t mix a better drink for the stock market,” said James Paulsen, who helps oversee $175 billion as chief investment strategist at Wells Capital in Minneapolis, in Minnesota, US.
Investors have been celebrating after the Fed’s surprise half-percentage point rate cut on 18 September sent the Morgan Stanley Capital International (MSCI) World Index of 23 developed markets on its biggest two-day rally since June 2006. They snapped up shares of commodity producers and industrial companies after global stocks fell to their lowest levels in 12 years.
The bears haven’t all retreated. Balestra Capital Ltd’s Jim Melcher and the Leuthold Group Llc. said the bulls are ignoring the reason for the central bank’s rate cut—concern that the world’s largest economy is heading into a tailspin.
Eye of the storm
Policymakers “realize that there’s a real economic threat of a recession if we’re not already in one and there’s a brewing financial crisis,” said Melcher, whose $260 million Balestra Capital Partners LP hedge fund in New York has returned 124% this year with bets against financial shares and bonds backed by subprime mortgages.
The rebound in prices “should be viewed as the eye of the hurricane,” Steven Leuthold, whose $1.72 billion Leuthold Core Investment Fund has beaten 97% of like funds this year, wrote in the September issue of the firm’s monthly research report. The Leuthold Group, also headquartered in Minneapolis, is concerned the economy will contract next year and cut its equity allocation to 30% from 50% on 17 July—two days before the Standard & Poor’s 500 Index reached a record.
Bond bears
Trading in treasuries shows bond investors expect the Fed will lower rates again before the year-end as the economy comes to a standstill. The yield on treasury two-year notes is almost three-quarters of a point below the designated 4.75% funds rate. In the three previous occasions during the past 20 years when that has happened, policy makers have cut borrowing costs.