Investors are “unambiguously bullish,” reads the first line of the color accompanying the May vintage of BofA’s closely-watched Global Fund Manager survey.
And yet, the “first signs” of what the bank’s Michael Hartnett described as “peak macro” may be emerging.
For example, a net 84% of respondents expect a stronger economy, very high to be sure, but down from 90% (figure below). Similarly, a net 78% of FMS investors expect an improvement in global profits, close to a record, but off last month’s peak.
Since 1994, five peaks in ‘FMS optimism’ were followed by a 75bps drop in 10-year Treasury yields over two quarters, Hartnett noted.
However, he said that’s “less likely in 2021” given the Fed’s “uber-easy” policy stance, which he credited (and “credited” is something of a misnomer there) with making inflation and taper tantrum the two biggest tail risks in the survey.
With the suspense thus spoiled, inflation now tops the “tail risk” list, followed by a bond market freakout (figure below).
Only 9% now identify COVID-19 as the biggest tail risk. That, despite the almost apocalyptic scenario unfolding in India.
You can thank, in part anyway, the media. Inflation is front-page news for the first time in many investors’ careers. As detailed over the weekend in “Dairy Aisle,” a self-fulfilling prophecy may be developing as the echo chamber gets louder.
When it comes to the level of yields respondents believe would cause problems for stocks, 2.3% is now the magic number. “The move from 1.5% to 2% is critical as a large majority of investors now think rates >2% would be detrimental,” Hartnett remarked.
I’ve talked at length (and that’s an understatement) lately about the shifting macro regime and how scarcely anyone can remember a time when the majority of investors weren’t dubious at the prospect of higher inflation. The idea of “hot” growth in advanced economies coupled with above-trend inflation was generally seen as a virtual impossibility in the post-GFC years.
The figure (below) illustrates the point perfectly. As Hartnett wrote, “higher growth and higher inflation is now the consensus.” That is anomalous, to say the least.
Whether markets can handle such a shift is an open question. Modern market structure was built atop an entirely different macro environment. It’s difficult to predict how it’ll function in an era of heightened macro volatility (see here and here).
Finally, if you’re wondering whether respondents to BofA’s survey are concerned about stagflation, the answer is “not yet.”
“‘Stagflation’ is not yet en vogue,” Hartnett remarked.
It’s unlikely that market participants will become overly worried about a stagflationary scenario in the near- to medium-term. After all, we’re still in the middle of the “boom” quarter in the US.
But, as the title of May’s survey suggests, rising prices are “the elephant in the boom.”