In its latest monthly Fund Managers Survey, Bank of America gives readers two options for a title:
- Red, White And Bullish, or
- Red, White and Boom
Both capture the prevailing sentiment, because just months after gloom had set in within the professional investing class, with secular stagnation quietly mentioned as one of the prevailing concerns, optimism has soared to a near record high level. This is how BofA's Michael Hartnett explains it:
Wall St. is bullish: expectations of “above trend” growth at five-year highs...
... global inflation expectations at second highest % since Jun 2004
... global profit expectations at six-year highs, with a net 56% thinking global profits will improve next 12 months, up from net 29% last month, because of, well, Trump...
... just 6% forecast lower bond yields in 2017, leading to a plunge in allocations to bonds, which just hit a 12 month low (net 58% UW from net 48% UW last month).
... long US dollar by far world's most “crowded trade”.
As a result of the violent moves in recent weeks, global bank stock positioning has hit record highs:
The optimism euphoria also means that all of the "cash on the sidelines" is no longer on the sidelines (although one wonders what happens to the cash that the sellers of risk assets pocket - does it go into some magical, parallel universe where it is no longer "on the sidelines?").
As Bank of America shows, cash drops to 4.8% (from 5.0% in Nov, 5.8% in Oct); and warns that on three prior occasions cash down 1ppt in two months (in 2001 & 2002) risk rally “paused”; but this time may be different: "FMS does not yet show “peak greed”...cash levels still high relative to bonds (97th percentile), and equities (64th percentile)."
In terms of exposures, not surprisingly In December investors rotated out of “growth” (tech, healthcare) and “bond proxies” (utlities, telcos, staples) into resources, banks and cyclicals.
Expectations: Net 39% expect value to outperform growth (up from net 30% last month); 32% expect high-quality stocks to outperform low-quality stocks (down from net 42% last month). Highest % in 13 months expect high-volatiilty to outperform low-volatility and HY to outperform HG bonds.
FInally, while at this point it is silly to even think of such silly things as "risks", this is what the consensus believes is the biggest "tail risk."