Fund managers scream capitulation as cash piles jump to dot-com crash levels - BofA
The market sentiment washout is nigh, according to the latest BofA Securities survey, but a bottom will likely require a shift in Fed feelings.
The October Fund Manager Survey "screams macro capitulation, investor capitulation, start of policy capitulation," strategist Michael Hartnett wrote Tuesday.
According to the survey of 371 money managers with $1.1T under management, average cash allocation has reached 6.3%, the highest since April 2001 and investors are now three standard deviations underweight stocks.
But a "big low" and "big rally" are still more likely in the second half of 2023 when Fed cuts become the consensus, Hartnett added. In the October survey, 28% predicted lower short rates, up from just 5% in March but still well shy of the 65% seen at other big lows, indicating the policy capitulation has a ways to go.
The macro capitulation looks already done with global growth expectations at a net -72%, close to an all-time low, while the huge overweight cash vs. underweight equities (NYSEARCA:SPY) (QQQ) (DIA) (IWM) (NYSEARCA:IWB) and financial market stability risk metrics at all-time highs illustrate the investor capitulation, Hartnett said.
Fed pivot odds rising
As the share of investors predicting short-term rates moving lower rises, the share of respondents looking for short-term rates to rise dropped to 78% in October from a January/February peak of 92%.
"FMS investors have repriced their expectations for terminal fed funds rates 50bp higher to 4.5%-5% in the past month," Hartnett said. "FMS investors’ forecast for Fed terminal rates in October ’22 is 4.38%, up from 3.71% in Sep, and 3.60% in August."
The most likely reason for a Fed pause or pivot remains inflation (a drop in the PCE deflator below 4%), but that was followed by a new entrant: a global credit event.
Weekly jobless claims rising above 300K was third, followed by the S&P 500 (SP500) (SPY) falling below 3,000 and high yields bond spreads (HYG) (JNK) (LQD) (USIG) rising back above 600 basis points.
Piling into the greenback
Long U.S. dollar (USDOLLAR) (UUP) is "far and away" the most crowded trade, the survey showed. That's followed by short EU equities (VGK) (EZU), long ESG assets (ESGU) (ESG) and long oil (USO) (BNO).
Investors are very overweight Utilities (XLU) and Staples (XLP), Hartnett added, with the contrarian trade long pound sterling (FXB) vs. the dollar.
"Inflation stays high as top 'tail risk' at 27% of FMS investors for 4th month in a row," Harnett noted. A deteriorating geopolitical situation came in at No. 2, followed by central banks staying hawkish and a deep global recession."
Is sentiment capitulation triggering an "inflation bull trap?"