Stock pickers on Wall Street go all-in on recession bets

BLOOMBERG

As Wall Street economists and central bankers debate if and when the US economy will slip into a recession, big money managers aren’t waiting to find out.
Increasingly, professional stock pickers are shifting money out of economically sensitive shares like banks while parking it in stocks seen as resilient during  economic downturns, such as utilities and consumer staples.
Hedge funds that make both bullish and bearish wagers have cut their cyclical holdings versus defensive equities to the lowest level since at least 2012, data compiled by Bank of America Corp (BofA) show. For long-only managers, their relative exposure to cyclical companies — whose fortunes hinge on the ebbs and flows of the business cycle — is near the lowest level since 2008.
It all highlights growing pessimism in the world of active investing, despite a rally that has added $5 trillion in equity values since the market’s October low.
The preference for defensive equities is a departure from last year when recession fear was raging and active funds were hanging onto a cyclical tilt. That stance signalled faith in the Federal Reserve’s ability to engineer a soft landing with its aggressive inflation-fighting campaign. Now, such confidence is hard to find.
The data on sector positioning adds further evidence about the persistent bearishness among pros. In BofA’s latest survey of money managers in April, cash holdings stayed elevated and bonds were favoured over stocks more than any time since 2009.
The defensive posture can set the stage for big rallies when bears are compelled to chase gains — worried about being left behind. That’s what happened, when solid earnings from technology firms such as Meta Platforms Inc overshadowed data showing slowing economic growth and hotter-than-expected inflation. That day, the S&P 500 jumped 2%, and Goldman Sachs Group Inc’s equity trading desk saw activity picking up.
Bears attributed a big part of 2023’s equity rally to those price-insensitive quant investors where have no choice but to buy stocks when prices go up, warning the multi-month advance is unsustainable.
With the S&P 500 having failed in several attempts to break above the 4,200 level, a lack of momentum is likely to put a cap on demand from quant funds.