The Fed's (and the president's) obsession with pushing stocks to all time highs has succeeded: the S&P is trading well above 3,000 (much to the chagrin of Morgan Stanley), and if it was Powell's objective to also get everyone invested in the biggest asset bubble of all time, he is certainly making headway.
As we reported yesterday, both retail investors...
... and hedge funds...
... are gradually capitulating, and together with systematic, risk-parity funds...
... and CTAs...
... are pouring ever more cash into the stock market.
Today, the latest Fund Manager Survey published by Bank of America's Michael Hartnett cemented these observations, and as BofA notes, this month’s survey "found investors have added risk, rotating into cyclical plays (equities, Europe, industrials, banks) and out of defensive ones (bonds, REITs, utilities, staples)"
As a result, the average cash balance fell to 5.2% from 5.6%, if still above the 10-year average of 4.6% as investors’ allocation to cash ticks down 2ppt to net 41% overweight, also well above the long-term average. As Hartnett reminds us, the FMS "Cash Rule" has been in "buy" territory for the past 17 months.
At the same time, the BofA Bull & Bear indicator ticks down to 3.0, close but above the contrarian "buy" signal of 2.0 (as a reminder, the FMS Cash Rule works as follows: when average cash balance rises above 4.5%, a contrarian buy signal is generated for equities. When the cash balance falls below 3.5%, a contrarian sell signal is generated.)
The reversal in sentiment following the May drop and the June surge, is most evident in the allocation to global equities which has retracted almost all of last month’s dip, rising 31ppt to net 10% overweight.
So with market professionals and retail investors, capitulating and jumping into the (boiling) pool, to mix metaphors about Wall Street and frogs, one would assume that investors are delighted by what is going on, perhaps?
Wrong: in fact, one can best describe the investors mood as "fear and loathing", with Hartnett noting that there is "No champagne for SPX 3000", for several reasons:
- Nobody expects growth, making the recent equity spike artificial and entirely on the back of central bank multiple expansion. As BofA writes, "FMS global growth expectations rise from last month’s decade low, rebounding 20ppt to net 30% of investors surveyed expecting global growth to weaken over the next year." As a remninder, last month saw the most bearish growth expectations since the 2000/01 & 2008/09 recessions.
- Nobody expects inflation, suggesting that as central banks are powerless to stimulate the broader economy, they will be continue to stimulate risk assets. Indeed, only a net 1% of the responding fund managers expect higher global CPI in the next year, "the most bearish inflation outlook in seven years"
- A recession is imminent as this is now the longest expansion on record: according to the survey, a net 73% of investors think the business cycle is a risk to financial market stability, marking an 8-year high.
- A record number of investors are worried about debt: in the most ironic observation, a net 48% of investors are concerned about corporate leverage and yet they scramble to buy the debt issued by these same companies; global profit expectations remain flat at net 41% of those surveyed saying they expect profits to deteriorate in the next yea
- The buybacks are too high: Last but not least, we find the very definition of irony as the survey found that a record number of fund managers, or 38%, find that corporate payout ratios (including share buybacks) are too high. In other words, everyone is buying stocks because buybacks are record high, and yet everyone is also angry thatr buybacks are record high.
The common theme: yes, the Fed managed to push the S&P to 3,000... and the reason there is "no champagne on Wall Street", and instead fear and loathing dominates, is because nobody believes that number is real, credible or justifiable without i) the Fed's backstopping, ii) with the economy sliding and iii) on the back of record buybacks. As a result, yes - stocks may be at record highs, but it's only because the Fed pushed investors - against their will - into the stock market. And it doesn't take a rocket scientist to guess what will happen when at the first sign of trouble, investors with little faith in the market, rush for the exits.
“The dovish Fed and trade truce have caused investors to reduce cash and add risk,” said Michael Hartnett, chief investment strategist, “but their expectations of an earnings recession and debt deflation still dominate sentiment. The pain trade for the summer remains up in stocks and yields.”
* * *
And speaking of risks, the final observations from the latest FMS lay out what Wall Street thinks is the biggest tail risk, which like last month remains "Trade War" at 36%, if sharply lower than the month before; monetary policy impotence climbs to the second spot at 22%, and a China slowdown (12%) and bond market bubble (9%) round out the top four
Meanwhile, in terms of position crowding risk, Long US Treasuries (37%) remains at the top of the list of the most crowded trades identified by fund managers, ahead of Long US Tech (26%) and Long IG corporate bonds (12%).
For the TL/DR crowd, we have reached the "bazooko circus" stage in the stock market.