It won’t surprise you to learn that the conflict in eastern Europe was viewed as the top tail risk by fund managers this month.
The latest installment of BofA’s popular survey showed 44% thought the war represented the biggest threat, up dramatically from February, which makes sense considering… well, considering last month’s poll was conducted prior to the Russian invasion.
Perceptions of recession risk rose sharply too, and inflation jitters remained elevated. Asset bubbles were a concern, and the plague eked out the seventh slot. Apparently, the world’s capital stewards are more worried about “Other” now than they are COVID (figure below).
Equally predictable was the rise of “long oil/commodities” to the top of the crowded trades list. Amusingly, “long ESG” took the third spot.
March’s survey was a case study in how market participants simply mark their expectations to market. I’m not deriding anyone, just stating the obvious: There’s little to be gleaned from the revelation that fund managers became more concerned about a Russian invasion of Ukraine once Russia invaded Ukraine.
Similarly, the fact that the percentage of fund managers expecting a bear market this year doubled to 60% from 30% the prior month isn’t a particularly useful piece of information considering the survey was conducted from March 4 through March 10, a period which included the Nasdaq Composite falling into a bear market.
What’s (perhaps) more interesting is the jump in cash levels, which rose to the highest since April of 2020 (figure on the right, below). At the same time, global growth expectations plunged to the lowest since October of 2008 (figure on the left).
Equity allocations are catching down to growth expectations, but there’s quite a ways to go yet. As I’ve mentioned a half-dozen times over the past two weeks, there’s still no sign of outright capitulation in US shares (although we’ve certainly seen capitulatory price action in Hong Kong).
“Economic growth and profit expectations are recessionary, but because inflation expectations are not recessionary, expectations for short-term interest rates are for hikes, not cuts,” BofA’s Michael Hartnett wrote, in the color accompanying the survey. “In addition, equity allocations are down but have not dropped to capitulation levels normally seen in a recession.”
That leaves BofA leaning “tactically and cyclically bearish.” It’s too early for a contrarian “buy” call, Hartnett said, after summing up the March survey by noting that cash levels are the highest since COVID and growth optimism the lowest since Lehman.
Happy days.
The biggest threat is from the Fed. So worried about inflation that they’re prepared to turn it into stagflation by tightening into a slowdown. Does the labor market currently look much like the stagnant situation of the 70s? Nope! So why are we rushing to replicate it? So we can create a self-fulfilling prophecy in which “intractable” inflation ultimately necessitates double-digit rate hikes?
Does it really make sense that what we’re facing is too much demand, when inflation is hitting the whole globe at once? The problem here is firms with monopolistic pricing power and supply chains that are incapable of accommodating competitors. JIT manufacturing means firms lock up components in long-term contracts, meaning producers of anything but the most basic goods get locked out of markets, and any disruptions ripple across entire industries. Can the Fed fix that? Will raising rates do anything about sanction-derived price volatility? OPEC collusion? Lack of housing? Lack of containers? Ships waiting in lines outside of inadequate and decaying port infrastructure?
I mean, seriously, what are modestly higher rates going to do to tamp down fuel, rent, or grocery costs? Are consumers going to stop borrowing to fill their cars or pay their rent or buy their food? Or does simply asking that question illustrate how silly the suggestion is?
Everybody is holding cash because they know that raising rates is an absurd move right now.
Agree Jon
I think last week, Yardini said it’s the 70’s all over again and that stream of thinking is a tributary not worth following because it’ll lead to a desert.
The tsunami of cash and it’s frozen state of suspension is a result of people unwilling to invest in stuff that’s needed for future growth and future generations. The Fed has contributed greatly to global wildcat speculation and the factual proof of that can clearly be seen in the decline of treasury rates for at least 25 years.
Instead of GDP growth backed by real stuff, we’ve all come to accept the fantasy based gaming and ponzi scammer opportunities that concentrate the jet fuel of money laundering.
Whatever the 70’s were, that’s not where things are heading. The one thing that seems appropriate, while markets are waiting on the runway, is the concept to crack down on money laundering, related to Russia, cyber security and crypto and the global world of evasion. From China to Russia to members of our Congress or UK and EU politicians, a serious global crackdown on corporate crooks will help generate a little more economic stability.
Whilst the equity market as a whole may have not capitulated, there are plenty of stocks of growth style stocks that are down 50%-80% since their peak in November. Many value style stocks have also experienced significant falls of circa 30% and are trading at multiples which are already discounting a recession.
For the market as a whole to capitulate, the tech mega-caps have to capitulate, and vice-versa. And their charts do look heavy.
“Covid” should/will head up the tail risk leaderboard soon, as the long-expected surge in China shuts in more production.
China will also show the actual virulence of Omicron BA2, as this variant’s virulence has been masked by the protection level (vaccination, prior infection, and demographics) of the countries where it has surged.
In China, BA2 is spreading in a population with very low protection level (least effective vaccine, low vaccination rate, low previous infection rate, high elderly population). As a preview, see Hong Kong, where the case fatality rate (CFR) of Omicron in the 80+ y/o population is now over 5%, a rate far higher than in other countries and reminiscent of the early 2020 Wuhan and NYC surges. BA2 is not “mild” in an unprotected population.
Recall how supply chains were disrupted by isolated lockdowns in a couple of Chinese ports last year.
H-Man, it still seems geopolitical is running the game. Once that is resolved, we deal with the aftermath.