‘Fragile, Neurotic Optimism’ As Cash Levels ‘Collapse’ Into Most Overvalued Stock Market Since 1998

The latest edition of BofA’s closely-watched global fund manager survey (entitled “The Moody Bulls”) is a tale of “growth expectations jumping, cash levels collapsing, and risk appetites surging”, according the bank’s Michael Hartnett.

The burgeoning optimism is hardly surprising. After all, stocks have run dramatically since those dark days in March, when “a great and powerful plague” (to quote a certain US president) forced the global economy to shut down essentially overnight.

And yet, as BofA goes on to say, June optimism’s was “fragile, neurotic [and] nowhere near dangerously bullish”. That’s in keeping with everything discussed here over the past week regarding light positioning across nearly every investor cohort that “matters”.

Read more: Maybe More People Need To Turn Bullish Before We Can Have Another Meltdown

Notably, cash levels plunged from 5.7% to 4.7%, in the June survey.

That is the largest drop since August 2009, and BofA emphasizes that it was “led by institutional not retail investors”.

(BofA)

FMS hedge fund net equity exposure surged to 52% from 34%. That’s the highest since September 2018, which some readers will remember as a peak for hedge fund exposure, which subsequently went horribly awry following Jerome Powell’s “long way from neutral” remarks and the implementation of new tariffs on China.

Attitudes around the economy improved. “GDP and EPS expectations rose as lockdowns ended”, Hartnett writes, adding that “fear of a prolonged recession fell to net 46% in June”. That’s down from 93% in April.

Not surprisingly, the biggest tail risk is a second virus wave, with COVID-19 capturing the top slot for the fourth month running.

(BofA)

The bank says “conviction short positions in small cap, value, EU, EM, banks, industrials [were] covered violently in June” as the curve steepened.

That was the story for markets until last week, when the pro-cyclical rotation finally took a breather amid a bout of risk-off sentiment. It could be that reports of the Trump administration pushing a $1 trillion infrastructure proposal will be just what the doctor ordered in terms of reviving that rotation and reenergizing the steepener — but it’s too early to tell.

The only conviction long from the FMS survey in June is US tech stocks, which are again seen as the most “crowded trade”.

Despite the renewed optimism, the largest number of FMS investors since 1998 think stocks are “overvalued”.

(BofA)

So, they’re aggressively trimming cash positions to chase the most overvalued market in 22 years. That underscores the “fragile, neurotic” nature of this new, uncomfortable bullish zeitgeist.

There was little change from May in terms of what respondents see as the dominant trends in the post-COVID world.

But there were marked shifts in attitudes towards the likely trajectory of the recovery and the characterization of the rally from the March lows.

37% now believe we’re in a new bull market, as opposed to just 25% in May. 53% still say it’s a bear market rally, but that’s down notably.

Although two-thirds still see the most likely shape of the recovery as “U” or “W”, faith in the “V” narrative is getting traction.

There was no word on Larry Kudlow’s “I-shaped” inflection.