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Stocks dropped on Wednesday, adding to August's losses after minutes from the latest Federal Reserve meeting revealed officials still see upside risks to inflation, suggesting more rate hikes might be needed.
Nevertheless, a survey of investors with over half a trillion dollars in assets under management are overwhelmingly pricing a different situation for next year: rate cuts.
The latest Bank of America Global Fund Manager Survey published Wednesday revealed that it's been nearly 15 years — November 2008 just after Lehman Brothers failed — since investors were this convinced interest rates would be cut over the next 12 months.
Over the last four decades, there have been just three instances in which the Fed cut rates without the economy falling into recession: 2019, 1998, and 1995.
And the bet from investors today is essentially that 2024 will mark the fourth instance.
Elsewhere in the survey, we find that 65% of respondents expect to see a "soft landing" in which inflation slows but the economy avoids recession.
For the Fed to bring the economy down to a simmer from a boil without consumers and the corporate world is a tall order, but not without precedent. And rate cuts have also featured during these periods.
In 1998, for instance, the Fed cut rates following an emerging market currency crisis and the implosion of Long-Term Capital Management, asserting "caution by lenders and unsettled conditions in financial markets more generally are likely to be restraining aggregate demand in the future."
"Against this backdrop, further easing of the stance of monetary policy was judged to be warranted to sustain economic growth in the context of contained inflation," the Greenspan-led Fed added.
Contrast this with how the Bernanke Fed characterized its September 2007 rate cut, which saw the central bank cut rates by 0.50% citing, "tightening of credit conditions [which have] the potential to intensify the housing correction and to restrain economic growth more generally."
The Fed added this rate cut would "forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."
A much sterner message than the one delivered nine years prior. And one investors today don't expect to hear even as the Fed backs off in the year ahead.
And should this circumstance come to pass, Bank of America does have one recommendation for investors: Watch REITs.
Real estate investment trusts have high exposure to the economy's biggest bogeyman: commercial real estate. "[I]f no recession, FMS says go max long," Bank of America strategists wrote, "but if REITs can't recover with Lehman-like positioning, then recession could be just around the corner."
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