Yeehaw! Big global investors are at their most confident since January 2022, according to the latest monthly survey from Bank of America. Yet, judging by the changing sentiment on Wall Street, this ebullience may be misplaced.
The survey showed that investors jettisoned bonds in favor of buying shares and commodity investments at near unprecedented rates, and also ran down their cash holdings.
However, this week has seen an alteration of perceptions about rate cuts in the US this year, aided by the speech on Tuesday by Fed Chair Jay Powell, who very effectively muddied the waters of certainty about monetary policy, leaving it to investors to make their decisions (as it should be).
In short, there’s now an emerging belief that rate cuts might not happen this year. Why? Well, the high levels of confidence among investors that they will is part of the reason.
The Fed and investors know inflation is not continuing to ease – Powell pointed that out in his speech several times. Even if the data starts turning favorable, the central bank will not rush to cut rates; it is becoming more cautious.
The Bank of America survey found that cash levels held by big fund managers in April fell to 4.2% of assets under management from 4.4% a month prior, the lowest for more than a year.
Investors sold bonds at a pace not seen since July 2003, to the point where they reported they were a net 14% underweight in bonds, a 20-percentage-point month-over-month decline. Overall, the survey showed investors’ bond allocation is now at its lowest level since November 2022.
And what did they do with the money liberated from bond holdings? Why, they scurried to buy shares — increasing their allocation to equities by six percentage points to net 34% overweight position — the largest such overweight since January 2022. That makes Wednesday’s sell-off hurtful!
Investors jumped into commodities in April, increasing their allocation to this asset class by 20 percentage points over March, the largest monthly increase on record, Bank of America said.
As a result, investors are now net 11% overweight commodities, the first overweight position in five months, but again that is starting to look a little ill-timed, thanks to Fed Chair Jay Powell, though gold remains solidly up compared with March.
On a macro level, some 78% of investors think a global recession is "unlikely" to occur within the next 12 months, up from 65% of investors in March, and the highest such level of optimism since February 2022.
Investor bets for above-trend growth and inflation rose to 24% in April, up from 12% in March and just 5% in January. This comes as 41% of fund managers surveyed see higher inflation as the biggest tail risk, followed by geopolitics at 24% (i.e., Ukraine and the Middle East).
Stagflation, where the economy experiences below-trend growth and above-trend inflation, remains the consensus view, at 60%. However, this is down from the 92% peak in September 2022. Only 9% of investors surveyed expect an environment of stagnation, with below-trend growth and inflation, and only 6% predict a ‘Goldilocks' scenario of above-trend growth.
And then we come to the problem – 46% of surveyed investors expect the Fed to cut twice this year, while 27% expect three cuts and 3% expect four cuts.
No cut doesn’t seem to have been an option – it should be.
