The big stock market rally of 2023, which defied expectations of a deteriorating economy, is finding renewed support from a previously skeptical group: CFOs of major US corporations. While their view of the market is far from unanimous, more CFOs are now looking to the Dow Jones Industrial Average
than be able to continue its rise, even if the chief financial officer’s views on the direction of the economy remain negative.
That’s according to the results of the CNBC CFO Council’s most recent quarterly survey, which shows that the views of top corporate CFOs on stocks and the economy are changing significantly quarter-on-quarter, at a time when the Fed has suspended rate hikes and The stock market has beaten expectations.
Last quarter, just 13% of CFOs said they could see a new high for the Dow, while more than half (56%) expected a return to the 30,000 mark. Meanwhile, CFOs are split into three roughly equal camps: those expecting a new high, those still expecting a return to 30k, and those not betting on the next big stock move.
Many investors and economists have come to believe that the economy will avoid a recession even as the Fed continues its efforts to lower inflation. The latest GDP data released on Thursday shows a stronger-than-expected pick-up in economic growth. However, CFOs’ improved market outlook is in no way related to belief in a soft landing scenario. Over 80% of CFOs in the second quarter survey said they still expect a recession. The schedule has shifted again, with just a third of CFOs expecting a downturn to start in the second half of this year. That was the expectation of more than half of CFOs last quarter. Meanwhile, just over half expect a recession in 2024 – 36% expect it to start in the first half of the year.
CFOs’ assessments of the economy remain largely unchanged and negative. Although CFOs say inflation has peaked, they still see inflation (32%) as the biggest risk to their business. And while US consumer spending and credit have remained relatively strong, CFOs rank consumer demand (18%) as the second biggest risk. Overall, the 50% of what CFOs identify as the top external risk factors for their business aligns squarely with survey results from the first quarter of the year. Over-regulation was also cited as the top risk by 18% of CFOs, rising the most in the results while risk from Fed policy fell quarter-on-quarter.
The quarterly CNBC CFO Council Survey was conducted June 16-26 among approximately a quarter of the 100-plus CFO members.
CFO fears further rate hikes by the Fed
In a recent call to CFOs ahead of the June FOMC meeting, several Council members raised concerns about a deterioration in the consumer outlook, which they fear is accelerating. They pointed to a significant drop in credit ratings and defaults, as well as supply chain data reflecting demand. Two CFOs said during the call they had reached out to the Fed’s regional governors directly to give them their views that the Fed should not simply pause rate hikes, but stop them, fearing the “long and variable lags between changes.” have as Milton Friedman defined them in monetary policy and changes in the economy.”
Equities, particularly tech stocks, rallied as views changed on the Federal Reserve’s aggressive rate-hike path, and the CFO’s view on rate hikes has changed, though they cite inflation as the main risk. CFOs are now less in tune than the market with Federal Reserve Chair Jerome Powell’s next interest rates. Half of CFOs expect the Fed to hold off another rate hike in July, with just over a third (36%) expecting a rate hike, while traders overwhelmingly expect a rate hike and Powell in a speech this week said it has done so several times in a row. Rate hikes could be coming.
This slightly more dovish view, outlined in the quarterly CFO survey, has lowered the year-end outlook for the 10-year government bond yield
. While the majority still expect the 10-year yield to be at least equal to or higher than the current range of 3.5% to 3.99%, nearly a quarter of CFOs (23%) now believe that the yield could fall below this level. The largest subset of CFOs (41%) expects the 10-year bond to be in a range of 3.5-3.99% through the end of 2023. Thirty-seven percent of CFOs expect 10-year returns to be 4% or more.
“Inflation hasn’t stopped yet”
It remains unclear whether the CFO’s view of interest rates is wishful thinking by some companies in sectors feeling the greatest impact of higher interest rates, or whether it is bound to become more widespread. At a recent private council meeting with CFOs in New York City, many members appeared to have resigned themselves to a Fed that will not change its interest rate rate even if they believe it should. A CFO, who was granted anonymity and was free to speak out at the event, spoke strongly in favor of further rate hikes, saying, “We need more rate hikes because inflation isn’t dead yet.” The CFO added that the US -Consumers, given their relative strength, would be able to accept further price increases and higher interest rates even if they didn’t like them.
Inflation will remain a major concern for the economy even if CFOs continue to express a positive view of the Fed’s work in fighting inflation. Over 90% now describe the Fed’s actions as fair (55%) or good (36%). That’s a slight increase from last quarter. However, CFOs do not believe the Fed will be able to bring inflation back to its 2% target any time soon. Most (59%) believe it will take until 2025 or later.
One issue that’s garnering increasing attention from CFOs is the Fed’s inability to fight inflation with large government spending programs to support the economy. Former Dallas Fed President Robert Steven Kaplan told CFOs at the recent private event in New York that while the Fed has raised interest rates 10 times in the past year, government spending remains at very high levels. The remnants of the American Rescue Plan Act (ARPA) of 2021 are still in the bank accounts of state and local governments. This money must be “committed” by the end of 2024 and spent by the end of 2025. In addition, the Inflation Reduction Act (IRA) and spending from the Infrastructure Act are fueling new projects in the US. These programs increase demand for goods, services, and labor at a time when the Fed is attempting to dampen demand for goods, services, and labor.
“These programs are the kind of thing you might see historically post and not before a recession… except we’re running them now,” Kaplan said. In follow-up comments to CNBC, he said, “Let’s wage a war on inflation that means more than just the Fed raising interest rates.”
This would potentially mean extending the timeline for spending the remaining ARPA funds, as well as prioritizing and timing IRA and Infrastructure Act spending. He stressed that a number of the projects made possible by these programs are critical to the future of the United States. Projects that help increase semiconductor capacity, support a sustainable energy transition, fight climate change and build electric car infrastructure. “But the scale of spending has to be balanced with the need to fight inflation,” Kaplan said. He warned: “If so much money is being spent in a short period of time and there are strict deadlines for doing so, some of the resulting projects could be of ‘minor’ effectiveness.”
This view of a unique economic environment that supports both resilience in economic growth and higher inflation has been cited by other senior leaders. “We’re all seeing it,” Schnitzer Steel CEO Tamara Lundgren said at the recent CNBC CEO Council Summit. “Infrastructure funds flowing through the system … Electric vehicles and batteries and solar and wind turbines are long-term structural demand drivers,” she said. There’s a good possibility of a recession, but she added, “Whatever this recession is, we may need a new name for it.” I’m not sure history has ever seen that before.”
Fed watchers and top managers remain concerned. “I’m concerned. No question…when you look at all of this impact, the rate hikes, and the continued inflation that we’re seeing, there’s only a limited amount consumers can take,” Wells Fargo CEO Charlie Scharf said in an interview with CNBC’s Andrew Ross Sorkin at this week’s Aspen Ideas Festival said the bank’s reviewed credit metrics remain “extraordinarily strong,” but added, “They’re slowly deteriorating, week by week, month by month.”
“As long as this is done in an orderly manner, it’s not the worst thing in the world because people have to get used to a more normalized environment, but it’s a very, very difficult thing,” said Scharf.
“Too much money has been pumped into the economy from both sides,” he said. “The question now is whether we are all aligned in fiscal and monetary policy to solve the problem we have to deal with,” Scharf said. “We are talking about theoretical inflation. Inflation is not theoretical. It’s affecting people in very real ways. And its negative effects may increase exponentially, especially for those with less money.”
Former Fed Vice Chairman Roger Ferguson, who was interviewed with Scharf in Aspen, said everyone was surprised by the economy’s resilience but he continued to believe there would be a “short and shallow recession”. He has always expected the Fed to hike rates several times for the foreseeable future and believes the economy is slipping into recession. His rationale: In the last dozen or so instances where the Fed has attempted a soft landing, it has generally been unsuccessful. “They don’t know the tipping point,” Ferguson said.
Source: CNBC
Comments are closed.