If you can measure a risk, you can go a lot further in managing it: Portfolio manager Michael White
Investors are pulling back from their record pessimism about stocks amid speculation that inflation has peaked, marking a break in the “apocalyptically bearish” sentiment that had been gripping markets, Bank of America Corp.’s monthly fund manager survey showed.
Global growth and profit expectations rebounded from all-time lows hit last month, while 88 per cent of investors participating in the survey now expect lower inflation in the next 12 months, strategists led by Michael Hartnett wrote in a note Tuesday. Investor allocation to stocks also rose from “dire” lows hit in July, according to the global survey, which included 250 participants with US$752 billion under management in the week through Aug. 11.
“Sentiment remains bearish, but no longer apocalyptically bearish as hopes rise that inflation and rates shocks end in coming quarters,” Hartnett said.
U.S. stocks have rallied since mid-June after a better-than-expected corporate earnings season and optimism that a slight cooling in U.S. inflation will prompt the Federal Reserve to reduce the pace of its interest-rate hikes in time to avoid a recession.
The technology-heavy Nasdaq 100 is now up 23 per cent since a low in June as rate-sensitive growth stocks led the charge higher. Investors anticipate that trend to hold: For the first time since August 2020, the survey participants expect growth stocks to outperform cheaper or so-called value in the next 12 months, according to Bank of America.
While JPMorgan Chase & Co. strategists -- among the most prominent top-ranked bulls -- said there’s room for growth stocks to extend the rebound, more bearish voices including Morgan Stanley’s Michael Wilson say the gains are just a pause in the bear market and that disappointing earnings are likely to spark another selloff.
Bank of America strategists also said they “remain patient bears.” With their base case calling for rising rates and falling earnings, they would take profits should the S&P 500 climb above 4,328 points -- less than 1 per cent above its latest close, Hartnett wrote.
The survey showed that investors expect the Fed to change course this year only if the key personal-consumption expenditures price index drops to below 4 per cent, well short of where it is now.
The number of investors expecting a global recession in the next 12 months rose to a net 58 per cent, the highest since May 2020. Exposure to cash fell to 5.7 per cent, but remained well above the long-term average of 4.8 per cent, the data showed.
Investors view persistently high inflation as the biggest tail risk, followed by a global recession, hawkish central banks and systemic credit events. In relative terms, investors are once again net overweight equities versus bonds, according to the survey.
The bank’s custom bull & bear indicator remains “max bearish,” which is seen as a contrarian signal for a short-term rally.
Other survey highlights include:
- Investors are long stagflation plays including commodities, cash and defensives, while being short European and emerging market stocks and the consumer sector
- Big August rotation to U.S. stocks, technology and consumer, and out of staples, utilities and the U.K.
- Investors see the G7 announcing an energy price cap as the most likely outcome of the energy crisis in Europe
- Most crowded trades are long US dollar, long oil and commodities, long cash, long FAANG stocks, short U.S. Treasuries and short EM debt