Investors have gotten much more confident during this year’s impressive stock market rally, and in doing so are possibly paving the way for a tougher second half, according to Bank of America investment strategist Michael Hartnett. The August BofA Global Fund Manager Survey showed that market professionals have reduced their cash allocations to a 21-month low and increasingly are expecting the economy to weather its various challenges are avoid a recession. That follows a general feel of pessimism in the air that, in a contrarian sense, helped fuel a rally that has boosted the S & P 500 more than 16% higher this year. “Bear positioning strong tailwind for risk assets in H1…not the case in H2,” Hartnett wrote in a summary of the closely watched survey. That trend switch has played out in a number of ways. Cash allocations have dropped to 4.8% of portfolios, below the 5% dividing line that has traditionally been a buy signal. Economic projections also have pivoted, with 42% of respondents saying a recession is “unlikely,” compared to just one in 10 in November 2022. Even if there is a recession, managers expect it to be mild, with 65% expecting a “soft landing.” Investors largely expect inflation to soften , with 81% expecting prices globally to ease over the next 12 months, which in turn is feeding the conviction that interest rates will come down . At the same time, optimism about company earnings has reached its highest level since February 2022, and expectations for lower rates has reached its top point since November 2008 despite the Federal Reserve’s ongoing fight against inflation , and ongoing expansionary fiscal policy. In sum, Hartnett said fund manager sentiment is at its “least bearish” level since February 2022, in the early days of a market slump that would take the S & P 500 down nearly 20% for the full year. Allocation to stocks is the least underweight as a share of portfolios since April 2022 and up 13 percentage points from July. From an asset allocation standpoint, Hartnett figures the best contrarian play is the “long utilities, short tech” trade on the equity side. He also says the real estate investment trust sector is a key one to watch. “REITs most fascinating to watch: if no recession, FMS says go max long, but if REITs can’t recover with Lehman-like positioning, then recession could be just around the corner,” he wrote. The survey was taken Aug. 4-10 and entailed 247 panelists with $635 billion in assets under management.
