The Not So Mysterious Case of the Vanishing Bulls - Transcript

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Welcome to RBC’s Markets in Motion podcast, recorded April 5th, 2022. I’m Lori Calvasina, head of US equity strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers. Today in the podcast, we run through the results of our quarter investor survey, which we conducted from March 28th to 31st of 106 institutional equity investors. The big things you need to know: First, stock market bulls nearly vanished in our 1Q22 survey. Second, valuations, margins, the Fed, gas prices & Russia/Ukraine are weighing heavily on investors, but on Russia/Ukraine some of the more dire outcomes aren’t seen as probable, and opinions on recession are split helping explain why us equities have been rebounding. Third, we saw a cautious bent to positioning views. Fourth, the survey results reinforce our belief that the US equity market has already baked in a lot of bad news, at least in part, but that the onset of a recession or major broadening out/worsening of the Russia/Ukraine war are key downside risks to monitor.

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Takeaway #1: Stock Market Bulls Nearly Vanished in Our 1Q22 Survey

  • In total, 21% were bullish (none were very bullish). This was a new extreme low for the optimists and the first time since mid-2019 that the bears outnumbered the bulls.
  • Meanwhile, the bearish/very bearish camp rose sharply from last quarter from 15% to 33%, but stayed below the survey high achieved in 2Q19. 
  • Nearly half of our survey respondents, 46%, described themselves as neutral on their stock market outlook.

Takeaway #2: Valuations, Margins, the Fed, Gas Prices & Russia/Ukraine Weigh Heavily, but on Russia/Ukraine some of the more dire outcomes aren’t seen as probable and opinions on recession are split helping explain why us equities have been rebounding 

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53% say valuations are expensive, up from 4q but below past survey highs. 

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55% expect margin contraction, up sharply from last quarter and survey highs. Thus suggests to us that buy-side expectations for earnings are likely more pessimistic than bottom-up sell-side consensus forecasts as 1Q22 reporting season comes into view.

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On recession, 42% said an economic downturn is likely or very likely, and 37% said one is unlikely or very unlikely. 

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Faith in the Fed is low but there is disagreement as to what kind of policy error will emerge, with 47% saying it's likely that the Fed will tighten too much, 33% saying they will tighten too little, and just 17% saying they will tighten the right amount.  

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Our respondents were generally worried about all of the hot economic topics of the day, but are a bit more worried about gas prices and the Fed than Russia/Ukraine, mortgage rates, and the yield curve.

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We spent a lot of time in this survey on Russia/Ukraine to see what is and isn’t getting baked in:

  • On Russia/Ukraine, in terms of what appears to be at least partially baked in already, well over half expect sanctions to endure for quite some time, don’t expect a clear winner, and think a European recession, cyber attacks on the US, and a Russian debt default are somewhat or very likely.
  • Issues where more than half were in the not very likely/very unlikely camp, suggesting to us that they pose downside risk to the market should they occur, included the use of nuclear weapons, direct NATO involvement in the military conflict, the US tipping into recession, the use of chemical or biological weapons, and the military conflict going on for multiple years.
  • While most believe the military conflict will be resolved within the next 12 months, few expect an imminent ceasefire, suggesting to us that a true peace deal could be accompanied by a favorable reaction in US equities.

Takeaway #3: not surprisingly we saw a Cautious Bent to Positioning Views

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On current views, most expect high quality, Large Cap & the US to outperform, while few expected Asia, EM, Developed Europe, or low quality to lead.

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In terms of what changed relative to December, outlooks for Defensives, Canada, Health Care, Large Cap, US, the commodities sectors, and Growth improved the most, while outlooks for Financials, EM, Consumer Discretionary, Small Cap, and Mid Cap deteriorated the most.

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There were two things that really jumped out in our positioning questions. First, geographical preferences are wide. Despite mixed/neutral views on the direction of the US equity market itself, 53% expect US equities to outperform over the next 6-12 months. Many investors have been confused about why US equities have rebounded in recent weeks, but our survey supports the idea that safe haven seeking has benefited US equities. 

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Second, Health Care ranked ahead of other defensive sectors in terms of the level of optimism in the year ahead outlook.

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Health Care also came in ahead of all other sectors in terms of the improvement in outlook relative to last quarter. This doesn’t seem like performance chasing to us, as Health Care has lagged both Utilities and Consumer Staples in terms of YTD returns and is barely outpacing the S&P 500 for the year. In this context, we view our survey results as supportive of our view that Health Care may be a better way to play defense going forward if US equities take another turn lower on recession fears.

Takeaway #4: Our investor survey informs our broader market call in two ways. 

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  1. First, the sharp drop in bulls in our survey provides further support to the idea, which we’ve discussed in prior podcasts when we’ve talked about the bottoms that appear to have been put in on the AAII survey and CFTC equity futures positioning data for Nasdaq and Russell 2000, that sentiment has already taken a major hit and a lot of bad news has been baked in. Our survey gives us some specifics on that thought. Disapproval of the Fed is already extreme, and investors are already bracing for margin contraction, lengthy sanctions on Russia, a European recession, cyber attacks on the US, and a Russian default.
  2. Second, it helps us understand what the big risks to our view are by highlighting issues that still have the power to surprise investors. The onset of recession is one of those key risks as fewer than half see it as likely to some degree. A major broadening out of the Russia/Ukraine war such that NATO is involved or nuclear/chemical/biological weapons are used is the other. 

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That’s all for now, thanks for listening, and be sure to check out our sister podcast, RBC’s Industries in Motion, for thoughts on specific sectors from RBC’s team of equity analysts.