Fund manager sentiment is the least bearish in nearly two years, according to one bank’s monthly survey, which in December captured responses from 254 participants with almost $700 billion in AUM between them.
The broadest measure of sentiment in the BofA poll rose nearly a full point from November (figure on the left, below). The metric, a combination of cash positions, equity allocations and expectations for growth, was the highest since January of 2022 although, at 3.4, it’s still near the low-end of “bull”/”bear” spectrum.
Recall that BofA’s pseudo-famous “Bull & Bear Indicator” (on the right, below) jumped to a middling 4.7 last week, not a contrarian “sell” signal by any stretch, but the highest since February nevertheless.
“Sentiment is the most upbeat since January of 2022 on ‘Goldilocks ’24’,” Michael Hartnett said Tuesday. Note that the two-week increase on Hartnett’s Bull & Bear Indicator was the largest in eight years. It came courtesy of ongoing inflows to junk funds as well as better equity market breadth.
The inflection in fund manager sentiment comes as individual investor moods peak alongside big inflows to US equity-focused ETFs and mutual funds.
Investor cash positions in the BofA poll dropped to 4.5%, a two-year low. Fund manager cash allocations were persistently elevated over the course of the hiking cycle. The peak was in October of last year, when the S&P bottomed.
Cash allocations above 5% trigger a contrarian “buy” signal in one of BofA’s frameworks. Below 4% is a “sell” signal.
There’s rampant speculation that large cash positions following $1.3 trillion of inflows to money market funds in 2023 could serve as a source of funds for an equity melt-up in 2024. Hartnett noted last week that inflows to money funds tend to continue for over a year after the last hike, and outflows don’t start until 12 months after the first cut.
The figure below, from the same December fund manager survey, shows the share of equity overweights versus cash overweights. After hitting a record relative low in September of 2022 following Jerome Powell’s stern Jackson Hole address, it’s been a steady “up in equities, down in cash” dynamic, crescendoing this month in the first relative overweight for stocks since the onset of the hiking cycle.
Hartnett noted that the 15ppt drop in cash allocations in December was the largest MoM decline since the 2020 election in the US. Fund managers are just 3% net overweight, the least since April of 2021.
Meanwhile, the 13ppt increase in equity allocations (to a net 15% overweight) was the biggest MoM increase since November of 2022, when stocks rebounded from the cycle lows amid softer data and expectations for more forgiving monetary policy (sound familiar?).
“91% say Fed hikes are over,” Hartnett wrote Tuesday, adding that expectations of lower rates and bond yields are now “at record highs this century as the most investors since November of 2008 say monetary policy is ‘too restrictive.'”
