The tide appears to be turning a bit for professional investor sentiment.
At regular intervals in 2023, the people who get paid to know what they’re doing were caught woefully offside beginning with the assumption that the H1 macro landscape would be defined by a mini-recession in the US and a re-opening mini-boom in China. That could scarcely have been more misguided. It turned out to be the opposite: The US boomed and the Chinese economy struggled even to keep up appearances.
A few months later, some discretionary investor cohorts found themselves under-exposed to a late-spring/early-summer equity melt-up catalyzed by a right-tail event (Nvidia’s historic beat and raise) that no one saw coming. No sooner had carbon-based investors jumped aboard than stocks swooned under the weight of a dramatic escalation at the long-end of the Treasury curve.
The chart on the left, below, shows the disconnect between fund managers’ allocation to equities and that of individual investors. The imperious/supercilious implication from that visual prior to the last two or three months was that dumb individual investors might be missing something. But, the disparity is now closing by way of institutional investors catching up, not individual investors coming around to the “reality” a market destined to re-test cycle lows.
“The gap between US individual investors’ allocation to equities and FMS investors is now the narrowest since February of 2022,” BofA’s Michael Hartnett wrote, editorializing around the results from the November vintage of the bank’s Global Fund Manager Survey. “A stable macro outlook and much more optimistic view on rates has taken FMS investors’ equity allocation overweight for the first time since April of 2022,” he added, explaining the figure on the right, above.
Hartnett’s allusion to rates was a reference to the very bullish outlook on bonds from the survey and the preponderance of panelists who believe the Fed is done and short rates are headed lower.
The overtly bullish bond view and marginally more constructive approach to equities wasn’t the only place where professional investors appeared incrementally more sanguine in this month’s BofA poll. Average cash balances plunged 55bps from 5.3% to 4.7%, the lowest since November of 2021, at the height of the pandemic “everything bubble.”
Recall that one of BofA’s contrarian “buy” signals is a cash rule that triggers when balances rise above 5%. As of this month, that rule is no longer showing “buy.” The latest signal lasted just one month (although, as the chart shows, cash balances were above 5% for the better part of the Fed’s hiking campaign).
Suffice to say some folks might’ve been forced off the sidelines by the rather pronounced cross-asset gains observed during the first several sessions of November.
The broadest measure of sentiment in the BofA survey (a combination of cash positions, equity allocations and growth expectations) posted its largest monthly gain in two years, but at 2.6, it’s still very bearish (the scale is 1-10, where 10 is bullish). Profit expectations inflected for the better, although there too, the outlook remains subdued.
All in all, investors are still “cautious,” Hartnett said, but despite pervasive trepidation around growth and earnings, nearly three-quarters of survey participants (who together account for well more than half a trillion in AUM) see a soft landing or, as Hartnett noted, “no landing at all.”
It is interesting that pre-GFC, professionals’ stock allocation was less volatile than and usually higher than retail investors’, while the reverse has generally been the case post-GFC. Any theories as to why?
As our Dear Leader has relentlessly pointed out, it can be explained by the rise of vol-control strategies along with hedge funds using ETFs to effect daily sector rotations along with CTA activities.
These flows have come to totally dwarf what old-school fund managers are doing.
The push button sector rotation players help explain the strength of small caps today. Maybe totally explain it.
Lot of short covering too, judging from which of my names (in all caps) had the biggest moves.
I have the impression that the survey panel for the BAML FMS is mostly old school discretionary managers. I don’t know that at all, but I was part of the panel for years and it’s hard for me to see how the algo, CTA, vol-control type of investor would bother having an opinion on the questions, and I think of HFs as too confidentiality-aware to participate. It’d be interesting to know.
If the FMS does indeed reflects old-school discretionary managers, then what has made them more volatile and lower-exposure – assuming I’m not just imagining a chart mirage.
Perhaps the concentration of the S&P 500 might have something to do with it. I think it might go against the grain of many active PMs to hold ~30% of the portfolio in seven names?
I don’t know the answer, or if the question is even valid.
Good point and a good question.
Perhaps they are reacting to the end of the Golden Fed Put Era? Telling themselves to be nimbler as the outlooks become even murkier than usual. I know that I am.
As opposed to looking at the algo-driven mayhem and just moving into indices out of incomprehension.
Okay, I have a theory.
The AAII Stock Allocation survey asks AAII members for allocation to both “stocks” and “stock funds” and reports the sum as “stock allocation”. Looking more closely at the chart, it seems to be the AAII members who are living in a higher and narrower allocation range post-GFC as compared with pre-GFC. Perhaps something has caused AAII members to be less motivated to swing allocation widely. Maybe more use of indexing plus the lower volatility of major indicies vs individual stocks?
The institutional investors, on the other hand, do not seem to have changed their allocation range much, post-GFC from pre-GFC. Institutional investors use index ETFs/funds, of course, but their performance is also usually measured relative to those same indicies, so using index ETFs/funds doesn’t eliminate the perceived need to go under/over-weight stocks to seek relative performance to a fixed-allocation benchmark.
Again, I have no idea if this is true – just speculating. That really was a yawning gap in 2022.