Bank of America Fund Manager Survey: is it time to brace for market correction?

The most recent monthly fund manager survey from Bank of America Securities has surfaced a mix of optimism and warning signals for the market.

Although this marks the most bullish sentiment recorded since November 2021, the positive outlook is largely fueled by anticipated rate cuts rather than robust earnings growth, posing risks of a sell the fact reaction, especially in a faltering economy. This analysis explores the key findings of the survey and discusses the implications for those trading on risk.

A striking detail from the survey is the notably low cash levels, which have dipped to 4.0%, the lowest in three years. Concurrently, stock allocations are at their zenith since January 2022—the point at which markets last peaked. 

Such trends might indicate an overextended optimism, potentially setting the stage for a market pullback.

Additionally, the survey identified a series of positions—long the 'Magnificent 7', long the US dollar, and short China equities—as the most crowded trades. The popularity of these positions could spell trouble, as overly crowded trades are prone to sharp reversals if sentiment shifts.

Investors also appear to be tactically shifting gears, moving from industrials to staples in what seems like a modest defensive rotation observed in May. This pivot suggests a broader trend toward more traditionally secure sectors, hinting at growing caution among investors about the market's forward path.

Asset allocation trends reveal a pronounced preference for large-cap growth, healthcare, technology, Europe, and commodities, with a noticeable lack of enthusiasm for real estate investment trusts (REITs), utilities, the UK, discretionary spending sectors, and bonds. Such disparities in sector preferences could amplify the risk of corrections if these favored sectors become too saturated with investment.

Overall, while the survey reflects a peak in bullishness not seen since late 2021, it also highlights several potential pitfalls that could destabilize the market. With cash reserves at a minimum, stock allocations at multi-year highs, and heavily favored trades possibly nearing their tipping point, risk traders are advised to proceed with caution. Diversifying investments and preparing for possible market corrections could be wise steps in navigating the uncertain terrain ahead.

Bank of America survey reveals optimism and caution among global fund managers

The latest Global Fund Manager Survey (FMS) from Bank of America provides a nuanced outlook for investors, blending optimism with cautionary signals. Although fund managers exhibit a notable bullishness, the highest since November 2021, driven primarily by expectations of rate cuts rather than solid earnings growth, there are crucial caveats that investors need to consider.

The survey indicates a shift in sentiment with eight out of ten fund managers anticipating rate cuts in the latter half of the year, reflecting a broad consensus that a recession may be avoidable. Despite this optimism, a backdrop of dwindling cash levels, which have dropped to a three-year low of 4.0%, suggests a more restrained approach in practice.

A key concern highlighted is the risk of stagflation, where inflation rises amid slowing growth. While managers are not in a rush to offload risk assets, they recognize that these assets are particularly exposed should more evidence of stagflation surface. This scenario presents a formidable challenge, especially for those who have been buoyed by recent fiscal stimuli.

From a macroeconomic perspective, the survey notes a slight decline in global GDP and EPS expectations, largely due to reduced pessimism about the U.S. economy. The concept of a no landing scenario, where the economy sidesteps a recession altogether, is gaining traction, now believed possible by 31% of respondents. Furthermore, a majority of 56% still holds out hope for a soft landing.

On monetary policy, the majority of fund managers foresee the Federal Reserve initiating rate cuts in the second half of 2024, with a substantial number expecting multiple reductions within the next 12 months. This anticipation could potentially soften bond yields, with 47% of managers predicting a drop.

The survey also sheds light on prevalent investment trends, identifying the long Magnificent 7 as the most crowded trade, followed by bets on the U.S. dollar and short positions on China equities. There's a noticeable shift in sector preference as well, with managers moving from industrials to more defensive staples, indicating a cautious approach.

Asset allocations reveal a strong preference for stocks, healthcare, technology, Europe, and commodities, whereas areas like REITs, utilities, the UK, and discretionary sectors are less favored. This disparity offers potential entry points for contrarian investors looking to capitalize on sectors that are currently out of favor.

Moreover, some fund managers are preparing for potential economic downturns by adopting contrarian strategies like favoring cash over stocks, preferring REITs over commodities, and choosing underrepresented markets like the UK and China over Europe and Japan. 

They are also shifting from tech to utilities and from healthcare to discretionary sectors, anticipating changes driven by a possible stagflation or hard economic landing.

This month's Bank of America Global Fund Manager Survey paints a complex picture for the investment landscape. While there is a wave of optimism about potential rate cuts and economic resilience, concerns about stagflation and economic downturns loom large. 

Investors would be wise to navigate this mixed environment with a strategy that includes considering contrarian investments in less popular sectors. 

However, our overall bullish bias remains intact. We strongly advised buying the dip at $SPX 5000. And we are looking for new all-time highs to ensue.