Investors are the least bullish in a year.
That was the headline takeaway from the October vintage of BofA’s Global Fund Manager survey, out Tuesday.
It’s perhaps not surprising that respondents were inclined to a little “extra” pessimism. The survey period was October 8th to October 14th, so the S&P’s first 5% drawdown in a blue moon was still fresh in the minds of the record 430 panelists (who together control $1.3 trillion in AUM) who participated.
But September’s mini-pullback isn’t what undermined sentiment. Indeed, stock allocations remain extremely elevated.
Rather, expectations for global growth, profits and margins all sank, with the growth outlook turning negative for the first time in 18 months (figure below, from the survey).
This comes as market participants ponder the “peak growth” narrative and a prospective policy error from central bankers, some of whom seem to be panicking in the face of an inflation spike that’s both larger and more persistent than anticipated.
Monday’s bear flattening impulse was a testament to the market’s belief that policymakers will be inclined to pull the trigger on rate hikes at the possible expense of growth. The 5s30s was the proverbial talk of the town (figure below).
As the chart subheading suggests, a flattening curve is always conducive to narrative and spin. This time is no exception.
Apropos, yield curve expectations in the BofA poll plunged dramatically. The net expecting a steeper curve dropped to just 23% this month, the lowest in more than two years and down more than 20 points MoM (figure on the left, below).
As the bank’s Michael Hartnett wrote, the increase in flattening expectations is being “driven by higher short term expectations as markets price in a Fed taper and eventual hike in 2022.”
A net 85% of investors expect higher short term rates, the highest since November 2018, when Jerome Powell was still considered a “hawkish” Chair and the Fed was engaged in double-barreled tightening, much to the chagrin of a certain boisterous US president.
That finding from the survey perhaps reinforces the notion that the “policy error” narrative is gaining traction among market participants. Narratives can become self-fulfilling.
As noted above, profit expectations also flipped negative (figure on the left, below). The net percent saying global profits will improve was 89% in March. It was -15% in this month’s survey. The 27-point monthly decline came just ahead of earnings season in the US.
A net 51% of respondents expect margins to contract (figure on the right, above). That isn’t surprising. After all, margins hit a record in the second quarter, and now face a number of gale-force headwinds including soaring input costs and acute wage pressure.
And yet, through it all, the allocation to stocks remains elevated. The disconnect between those Overweight equities and growth expectations is now glaring indeed.
The “bottom line,” Hartnett said, is that this month’s poll was “the least bullish survey since October 2020.” Readings for global GDP and EPS “show macro momentum is the weakest since the COVID shock,” he added.
The title of this month’s poll: “Bulls go into lockdown.”