“The humans are still bearish but a lot less bearish than in Q4,” BofA’s Michael Hartnett said Tuesday, in the January vintage of the bank’s closely watched Global Fund Manager survey.

Recession expectations among panelists peaked two months ago at 77%, and have since receded a bit. Historically, peak recession worry marked “turning points in asset prices,” Hartnett remarked.

Speaking of inflections, more investors now believe short-term rates will be lower in 12 months than those who see higher rates. That’s obviously meaningful to the extent it’s a reflection of expectations for monetary policy.

Although cash levels are still elevated versus the post-dot com bust average, they’re down to 5.3%, well off the highs and down sharply from December. (Remember: Cash is a de facto short and cash Overweights helped explain the absence of demand for downside hedges last year.)

“The combination of peak rates and peak recession fears is causing cash allocations to fall,” Hartnett said.

Although survey participants were still overtly bearish on the global economy over the next year, the net negative 50% reading nevertheless counted as the most optimistic outlook in quite a while. Part of that’s down to high hopes for China’s reopening.

The RoW outperformance narrative (currently the equity theme du jour) was on full display. Allocations to US stocks dropped sharply in this month’s poll, with FMS panelists the most net Underweight since October of 2005. The MoM increase in investors’ Underweight to US shares was the largest ever.

Emerging market equities and European stocks were the apparent beneficiaries. Investors’ net Overweight in EM shares jumped to the highest since June of 2021, while investors flipped Overweight European stocks for the first time since Russian tanks rumbled into Ukraine.

Not surprisingly, the biggest tail risk was “inflation stays high,” and the most crowded trade was “long USD.” I’d note that various manifestations of “short USD” are popular now, so I’m not sure how crowded the long side actually is anymore, but the overarching message (that the dollar might’ve peaked given the prospect of better-than-feared global growth, a hawkish ECB, a prospective pivot from the BoJ, a less hawkish Fed and so on) is consistent with one of 2023’s early macro talking points.

Only 35% of panelists expect a peace agreement in Ukraine this year. Participants see the S&P at 3,892 in 12 months. Virtually no one expects the US benchmark to be above 4,600 at year-end. Even fewer see the S&P falling below 3,000.