Last month, Bank of America's survey of active investors revealed something striking: for the first time in history, the response to what the professional community perceived as the most crowded trade on Wall Street, was "Long Bitcoin" (according to 26% of respondents), followed by "Long Nasdaq", while "Short US Dollars" was in third spot. One month later, things are back to normal and the 179 participants with $516bn in AUM, have eased back on their cryptocoin euphoria, and for the 5th time this year, "Long Nasdaq" is back in top spot according to 29% of respondents.
Going down the list, long US/EU Corpotate bonds was 2nd according to 18% while long Eurozone equities was in third spot at 16%. What is perhaps most surprising is how quickly the bitcoin euphoria has faded, and it no longer appears anywhere in the list of most crowded trades as of October.
Compare this chart to what was revealed last month:
Of course, as we pointed out last month, the survey did not mean that everyone was long bitcoin; it just means that everyone thought everyone else was long bitcoin. And since bitcoin appears to have plateaued for now, and is no longer dominating the newsflow, the "professional investors" perception that everyone is rushing into bitcoin has likewise faded to the point where suddenly nobody thinks all their peers are chasing into the best performing asset of the past two years.
Something else that has faded from collective consciousness, is the fear of North Korea: whereas last month, a whopping 34% of FMS respondents said that Pyongyang launching World War III (or similar) was the biggest
"tail risk", in October a more conventional worry returned to the top of the list of things that keep traders up at night, namely a central bank (Fed or ECB) policy mistake according to 24% of survey participants.
... with Korea sliding into second place with 23% of respondents, but what is more interesting is the surge in "crash in global bond markets" which stormed into third place, doubling the September response rate to 22%.
Looking ahead, the smartest people on Wall Street repeated what they said last month, namely that over the next 6 months a recession would be the most surprising event (49% of respondents, down slightly from 54% in September), while an equity bubble is least surprising (net -30%), in other words virtually everyone is well-aware that stocks are in a bubble, however this will not burst leading to an economic contraction. Fingers crossed for central banks...
Here another paradox emerges: despite not predicting recession, when looking at investing styles over a 12 month horizon, FMS respondents believe theat high quality earnings will beat low quality earnings (net 45%, up from 42%), and that value will beat growth (net 28%, up from 20% in Sept). A curious inversion is that unlike in September, professional investors no longer believe that low volatility will beat high volatility, as the net number of respondents turned negative.
Meanwhile, professional investors are becoming increasingly more invested, with the average cash balance dipping to 4.7%, the lowest in 2½ years, and well down from the Oct’16 peak of 5.8%; As BofA notes, the high FMS cash since Q1’16 has coincided with an $18tn increase in global equity market cap, and here Michael Hartnett reminds us of the "Icarus intact", according to which a faster drop in cash to 4.2% by 2018 would mean a "sell signal."
In terms of capital allocation, 45% are now overweight global equities (a 68th %ile), which according to BofA, the +40-45% zone has historically coincided with equity underperformance versus bonds & cash over next 3 months. The table below shows what the subsequent 3 and 6 month equity returns have been when equity "euphoria" reaches the current levels.