Don’t Call It A Bubble

Don’t Call It A Bubble

Last month, for the first time since the onset of the pandemic, fund managers polled by BofA no longer identified the virus as the top tail risk.

Anecdotal though it was, it was still a milestone of sorts, and spoke to a growing consensus in the investment community that science has triumphed over the pandemic, albeit not before COVID-19 killed nearly 3 million people globally.

Of course, the situation looks entirely different if you’re poor in Brazil or struggling in India than it does if you’ve just received your second dose of the Pfizer or Moderna shots in the US and are now looking forward to getting back to a normal existence just in time for summer. This morning, following the J&J news, Moderna released a statement declaring that a “comprehensive” review of all available safety data through March 22 doesn’t suggest a link with blood clots. I scanned replies on social media. One unfortunate individual writing from a small country outside the US said he could “only dream” of getting the Moderna shot.

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

Before this turns into (another) long lament on inequality, let me steer it quickly back on track. The April vintage of BofA’s Global Fund Manager Survey found vaccine rollout nearly slipping to the number four spot on the same tail risk list.

Now, fund managers are just as worried about higher taxes as they are about vaccinations (figure below). It’s probably safe to say that if the survey reflected personal worries as opposed to market concerns, higher taxes would have a good chance on being number one.

“Wall Street bubble” and “more regulation,” which grabbed the four and six spots last month, respectively, weren’t in the top-5 this month, or at least not that I could tell.

“Risks [are] now associated with boom not recession,” BofA’s Michael Hartnett said.

The proliferation of sometimes hyperbolic media coverage around inflation risk likely contributed to the persistence of the concern among fund managers, and Q1’s bond selloff (the worst in decades, depending on your benchmark) was a reminder that “tantrum” risk is real. But note that vaccine rollout risk was actually seen as more worrisome in April than it was in March. The big change in the tail risk list was the increase in tax worries and the emergence of “peak growth” as a concern.

Inflation expectations remained near all-time highs in the April survey, with a net 93% of respondents expecting higher inflation over the next 12 months. That was flat from March, but still a record. Notably, the contingent of survey participants expecting higher growth accompanied by higher inflation is accelerating, while those looking for a new “Goldilocks” regime (i.e., strong growth and subdued inflation) is falling.

“This has happened on only two other occasions, in March 2011 and December 2016,” Hartnett remarked on Tuesday, referencing episodes when the dark blue line has eclipsed the light blue (figure above).

As regular readers (and, really, anyone who keeps themselves even remotely apprised of the market narrative) knows, valuations are stretched. Just about the only way you can justify current multiples is by reference to bond yields, and even that’s becoming tenuous.

Global stock funds have witnessed more inflows in the past five months (on net) than in the past dozen years combined.

Just 7% of surveyed investors said the US equity market is in a bubble (figure below).

A quarter said we’re currently witnessing an “early-stage bull market.” Two-thirds said this is a “late-stage” bull.

Summarizing, Hartnett called the April survey “uber-bullish but no more bullish than Q1.”

He suggested “positioning is peaking” and remains “cautious” on risk asset returns.

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