Recent investor surveys by Bank of America Corp. suggest that the surge in bullishness might indicate that it’s time for global stocks to be sold.
Bloomberg reported that the October survey, led primarily by strategists Michael Hartnett and others, showed a marked rise in equity allocations, as well as a decline in bond exposure. This has triggered a “sell signal” for global equities.
Cash levels in global portfolios fell to 3.9% in Oct., from 4.2% in the previous month.
This level of optimism has led the Bank of America team, to caution investors.
In the past, similar signals led to a decline in global stocks. The average drop was 2.5% within a month and 0.8% within three months after the trigger.
Source: Bloomberg
Investor optimism surges since 2020
Investor optimism is at its highest level since June 2020. The survey cites several factors as the reason for this shift.
This newfound confidence is fueled by expectations for Federal Reserve rate reductions, economic stimulus in China and hopes of a’soft landing.
According to the report equity allocations almost tripled in comparison to last month. This led to a net 31% over-weight.
The net underweighting of bonds was a record.
Despite the enthusiasm, BofA’s Bull & Bear Indicator still hasn’t reached the critical “big sell signal” level of 8 but the strategists warn that the market froth will continue to grow.
Source : Bloomberg
Sector rotation and its risks
Investors have shifted their focus from defensive sectors such as staples and utilities to emerging markets, discretionary and industrial stocks.
The Chinese stimulus is expected to have the greatest impact on commodities and emerging-market stocks, while government bonds and Japanese shares may be the biggest losers.
Investors are also more focused on hedging in advance of the US election.
A potential “sweep election” is seen as a major catalyst for higher bond yields, a stronger US Dollar and could also pose a risk to the S&P 500.
Investors’ expectations of growth have risen, with 76% predicting a softer landing for the economy and only 8% predicting a hard one.
Investors have identified geopolitical conflict (33%), inflation accelerating (26%), and the potential for a US recession (19%) as their top risks.
Positioning-wise, the most popular trades are long the “Magnificent Seven” tech stocks (43%), gold (17%) and Chinese equities (14%)
Investors must weigh the risks and rewards carefully as optimism increases.
This post Investor Bullishness Hits High, Sparking a ‘Sell Signal’ for Global Stocks: BofA Survey may be modified as the updates unfold
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