Bank of America Survey: Global Stock Markets Flashing Sell Signals
A survey by Bank of America shows that investors' bullish sentiment towards the global stock market has reached a selling signal. In October, stock allocations increased significantly, with cash levels dropping to 3.9%. The survey indicates that investors' optimism towards the Fed rate cuts and stimulus measures in China has significantly increased, leading to a nearly twofold increase in stock exposure. Historical data shows that after similar selling signals, global stock markets on average fall by 2.5%. Despite the high optimism, the bull-bear indicator remains below 8, indicating an overbought market. The survey covered 195 asset managers with total assets amounting to $503 billion
A survey by Bank of America shows that investors have become so bullish that it may be time to sell global stocks.
Led by Michael Hartnett, strategists wrote on Tuesday that investors significantly increased their allocation to stocks in October, while reducing bond exposure, causing the cash proportion in global investment portfolios to drop from 4.2% last month to 3.9%, triggering a "sell signal" for global stock markets.
Cash proportion in global investment portfolios drops to 3.9%
Hartnett and his team wrote that the October survey showed "the biggest jump in optimism since June 2020" regarding investors' views on Fed rate cuts, Chinese stimulus measures, and a global economic soft landing. Stock exposure nearly doubled from the previous month, with a net increase of 31%. Bond exposure saw a record large fluctuation, experiencing a net decrease of 15%.
Similar sell signals have occurred 11 times since 2011, with global stock markets averaging a 2.5% decline in the month following the sell signal and a 0.8% decline in the three months following. The team stated that "the bubble is expanding," but Bank of America's Bull & Bear Indicator remains below 8. This level indicates that the rally has gone too far, issuing a reverse sell signal.
Following the Fed rate cuts, the resilience of the U.S. economy, and the stimulus from China's fiscal and monetary measures, global stock markets continued their bull market trend after a round of volatility in early September. Boosted by the strength of the U.S. stock market, the MSCI Global Index hit a new all-time high on Monday.
The third-quarter earnings season for U.S. stocks also started well, with major banks' performances last week soothing the market. The S&P 500 index extended its gains for the fifth consecutive week on Monday, marking the 46th historical closing high this year.
This optimism is reflected in respondents flocking to emerging markets, non-essential and industrial stocks, while withdrawing from defensive sectors such as necessities and utilities. The survey shows that the biggest winners of China's economic stimulus plan are emerging market stocks and commodities, while the biggest losers are government bonds and Japanese stocks.
Fund managers' long positions in U.S. stock futures are close to record levels
The survey was conducted from October 4th to October 10th, with 195 participants totaling $503 billion in assets. Here are some other key findings:
About one-third of investors plan to increase hedging before the U.S. election, believing this will drive bond yields and the U.S. dollar higher, while hitting the S&P 500 index
Growth expectations hit the fifth largest increase on record, with 76% of investors expecting the economy to experience a soft landing, while only 8% of investors expect a hard landing.
Investors expect the Federal Reserve to cut rates by an average of 160 basis points over the next 12 months.
Most popular trades: long on the "Big Seven" (43%), long on gold (17%), long on Chinese stocks (14%).
Biggest tail risks: geopolitical conflicts (33%), accelerating inflation (26%), U.S. economic recession (19%), U.S. elections (14%), and systemic credit crisis (8%).