In Milestone, COVID No Longer Top Tail Risk For Fund Managers

“Investor sentiment is unambiguously bullish,” BofA’s Michael Hartnett wrote, in the color accompanying the March vintage of the bank’s closely-watched global fund manager survey.

In something of a milestone, COVID-19 is no longer the number one tail risk in the poll.

Needless to say, this is the first month the virus hasn’t occupied the top spot on the tail risk list since the onset of the pandemic. Tellingly, its usurpers are “higher than expected inflation” and “bond market tantrum,” two related risks.

There’s quite a bit of irony in that visual. While “bond market tantrum” is a tail risk mainstay (if not necessarily in each monthly BofA FMS vintage, then certainly in most market participants’ minds), “higher than expected inflation” owes its ascent to the top of the list to the policy conjuncture catalyzed by the pandemic.

It’s also ironic that vaccine rollout would take just the third spot at the precise moment when one of the vaccines has been halted by more than a dozen countries on concerns about blood clots.

As far as the economic outlook, it “remains the best ever,” Hartnett remarked. A net 91% of respondents expect a stronger economy.

That’s consistent with the discussion from “Buy High, Sell Higher.” The bottom line is that between unprecedented stimulus, fiscal-monetary policy coordination and reopening optimism, everyone (or almost everyone) seems ragingly optimistic.

BofA also noted that the March survey showed the net percentage of FMS investors who expect global profits to improve over the next 12 months is the highest on record at 89%. That’s better than previous peaks seen in February of 2002 and December of 2009.

Inflation expectations (in the survey) are at record highs with 93% of respondents seeing higher inflation over the next year. Five-year breakevens touched the highest since 2008 this week.

Notably, the net percentage of investors who expect a steeper curve seemingly peaked in January. It’s still elevated, but is on the way down.

That, Hartnett wrote, is “driven by a larger number of investors expecting higher short term rates.”

Connect the dots. Record-high inflation expectations means the market may begin to pull forward Fed hikes, leading investors to anticipate higher short-end yields and bear flattening in the curve.

Of course, that’s not the only way to get flatter. The Fed could tamp down any bear steepening impulse with WAM extension, catalyzing a gentle bull flattener, presumably to the delight of risk assets everywhere.


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3 thoughts on “In Milestone, COVID No Longer Top Tail Risk For Fund Managers

  1. Astonishing groupthink at work, as in “everyone I knows has money to spend and plans to do so.” No doubt true as birds of a feather do flock together.

    Down the road they may be disappointed as the other 90% they barely acknowledge, much less know, drag down the momentum. But until then, their happy narrative will play out in the markets because — because they are the ones making stock investment decisions.

  2. This is one of those times ( we have seen these before ) where the outlook is as clear as it has been in half of a decade at least.. Everyone is on the same side of the boat , Past experiences indicate that caution should not be thrown to the wind . As for me …yup , I am doing just that but trying to keep one hand on the ejection seat handle for a surprise of sorts . Nothing is ever as certain as it appears on the surface . Mr. Market can be the master of disaster..

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