The buy signal Bill Ackman is watching for stock markets

Pershing Square Capital Management founder and CEO Bill Ackman recently told CNBC that investors should look out for the Federal Reserve pausing rate hikes as a sign to buy, and also offered some insight into the positions his own fund is taking at this time.

Renowned hedge fund manager of Pershing Square Capital Management Bill Ackman has warned investors to keep watching what the Federal Reserve does and wait for a buy signal for equities.

“Once people realise that the Fed doesn’t have to keep increasing rates and will soon be taking rates down, that’s kind of a buy signal for markets,” Ackman told CNBC’s Squawk Box last week.

Ackman said he expects the Fed to continue raising rates to or around 4%, after which they’re likely to be kept at that level for a year or so. Asked where he sees inflation 12 months from now, he said at 4%, maybe 3.5%, and on its way down.

“The question is how far in advance does the market predict that kind of outcome. I think if people see inflation come off 8.5%, you start to see a pretty powerful continuing trend, then I think people will expect at some point the Fed to ease,” Ackman added.

Following news that the rate of US inflation was higher than forecast in August, the S&P 500 sank 2.7% within the first hour of trading on 13 September. While the latest CPI rate of 8.3% is lower than July, it is still near a four-decade high.

Buy great companies to ride the challenge

Ackman was also pressed on his own portfolio during the interview. He said that his holdings had remained the same this year, bar dumping Netflix [NFLX] in April, having bought it only three months earlier.

“We think, ultimately, if you own great businesses you can ride through a challenging time like this,” Ackman said, referring to why he’s choosing to hold his positions despite the challenging environment for equities.

Investors will have to wait until November, when Pershing Square Capital Management publishes its 13F for the third quarter, to see if Ackman has been true to his word.

As of the end of June, the fund held just seven positions. Home improvement retailer Lowe’s [LOW] made up 24% of the portfolio with a stake worth $1.78bn. Canadian Pacific Railway [CP.TO] was its smallest holding with a weighting of 2.8% and a value of $205.6m.

Chipotle Mexican Grill [CMG] was the second biggest with a weighting of 19% and value of $1.44bn. Burger King owner Restaurant Brands [QSR] was next with a weighting of 16% and value of $1.19bn. Another consumer discretionary stock, Domino’s [DPZ], had an 11% weighting and $803.3m value.

Real estate firm Howard Hughes [HHC] had a weighting of 12% and value of $926.9m. Hilton Worldwide [HLT] had a 15% weighting and value of $1.10bn.

Ackman sold some shares in the second quarter in Chipotle, Restaurant Brands, Hilton and Domino’s, but the percentage changes in shares held were minimal.

Bearish sentiment remains

What are analysts saying about when equities might bottom and when might be the time to buy?

Back in July, Morgan Stanley’s chief investment officer in the wealth management division, Lisa Shalett, said that “the central bank typically [doesn’t] end a tightening cycle until its policy rate is above inflation”. At the current pace, “we would need to see genuine damage to the labour market before the Fed would change course”, she added.

BofA’s sell-side indicator rose for the first time since October last year in August. According to the bank’s head of US equity and quantitative strategy, Savita Subramanian, despite the apparent full-month optimism, sentiment could be turning bearish again following Fed chair Jerome Powell’s hawkish speech on 26 August. Wall Street closed higher on 9 September, ending a three-week losing streak, and this trend extended into the following week, with stocks closing higher on 12 September.

“Improved sentiment, especially following a 17% rally off the June lows, suggests the bulls haven’t fully capitulated yet,” Subramanian wrote in a note to clients seen by Bloomberg. “We still see no real signs of a bull market.”

Subramanian reaffirmed her year-end target of 3,600 for the S&P 500. The market hasn’t yet seen the full impact of the Fed’s tightening, which BofA is expecting to accelerate later this month. Its next policy meeting is on 20–21 September.