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Veteran Money managers Slash U.S. Stock Exposure As Fed Rate Cuts Loom

At the conclusion of a volatile quarter in the markets, optimism about impending rate reduction is igniting both animal spirits and worry in equal measure.

Famous money managers have ceased investing in the most recent market boom, claiming that expectations for looser Federal Reserve monetary policy are exaggerated given the high rate of inflation. If rate reductions were to occur, they would be aimed to stop a recession that would also be unfavorable for stock returns.

Two weeks after starting it, Barclays Wealth Management recently closed out an overweight position in developed market stocks. Legal & General, which oversees $1.4 trillion, has reduced its equity exposure to the greatest underweight since the epidemic after coming to the conclusion that the US economy will continue to suffer from the effects of aggressive tightening for months to come. With the instability in the banking sector this month, asset managers, according to Deutsche Bank AG, changed their stock exposure from being near to neutral to being halfway approaching record low underweight measures.

The possibility of a rate drop before the year’s end may be overstated by market-implied predictions, according to William Hobbs, chief investment officer at Barclays Wealth Management. He like to take a defensive stance.

This caution contrasts with the tech-heavy Nasdaq 100’s 20% increase during the first quarter of this year, which was its largest quarterly gain since 2020. The price of Bitcoin has also increased by more than 70% due to speculative frenzy.

Falling bond rates and optimistic reports of a looser Fed balance sheet have been targets for markets keen to put fears about the banking industry spreading anxieties to rest. This viewpoint is in stark contrast to the most recent statements made by Federal Reserve officials.

While Fed Chair Jerome Powell has emphasized that officials don’t foresee decreasing rates any time soon, Boston Fed President Susan Collins on Friday indicated that more needs to be done to bring inflation down.

Markets have factored in a positive scenario in which falling inflation leads to 60 basis points of rate reduction by year’s end. The two-year breakeven rate, a gauge of market expectations for inflation, is currently hanging nearer the Fed’s objective than it was prior to the banking crisis. A data released on Friday that showed US inflation grew last month by less than anticipated and consumer spending steadied supported the case that declining inflation will enable the Fed to cease its cycle of rate hikes.

But, this attitude of paying for excellence may swiftly change. Nouriel Roubini, chairman of Roubini Macro Associates, summed it up last week at a conference of economists near Lake Como: “We cannot achieve price stability, maintain economic growth, and have financial stability at the same time.”

Fund flows highlight concerns over the risk rally. According to Bank of America, which cited statistics from EPFR Global, investors rushed to cash, pouring $60 billion into money market funds while withdrawing $5.2 billion from global stock funds in the week that ended on Wednesday.

The crisis in liquidity that engulfed Credit Suisse Group AG and revealed the shaky balance sheets of US regional lenders like SVB Financial Group marked a turning point for Legal & General.

John Roe, the head of multi-asset funds at Legal & General, cautioned that the US economy has not yet completely absorbed the full impact of the Fed’s rapid rate rises. He has decreased his exposure to stocks and increased long-term government bonds as recession hedges.

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