The recent turbulence on Wall Street, which pushed the U.S. stock market into its first correction in about two years, seems to have soured fund managers on where the economy may be headed.
According to the BofA Merrill Lynch fund manager survey for February, 70% of those polled believe the global economy is in its “late cycle,” the highest such reading since January 2008, right as the financial crisis began to gather steam.
The late part of an economic cycle typically coincides with the market’s peak and precedes a decline into recession. According to the Wells Fargo Investment Institute, which in early January suggested the U.S. economy was poised between the mid and the late parts of the business cycle, this stage is marked by moderating growth, tightening credit, a peak in confidence, higher inflation and an acceleration in the rate of interest rates rising.
Some of these factors appear in the current cycle. Investor optimism recently hit a seven-year high, before dropping to a three-month low in its latest reading. And a recent report showed wages growing at their fastest pace in more than eight years. That raised concerns about whether inflation could be returning to markets after years of dormancy and those fears sparked worries that the Federal Reserve could become more aggressive in raising rates. In the decline, both the Dow Jones Industrial Average DJIA, +1.03% and the S&P 500 SPX, +1.34% fell into correction territory, defined as a 10% drop from a peak. Both have subsequently recovered some of that ground.
The changing views on inflation and rates have been widely credited with sparking the recent volatility on Wall Street and the survey showed that 45% of respondents said that an “inflation-induced bond crash” was the biggest risk facing markets, followed by a policy mistake by either the Fed or the European Central Bank.
The equity correction was also marked by an exodus from stocks. According to the BofA survey, equity allocation fell to net 43% in February from 55% overweight in January, the largest one-month decline in two years, according to the investment bank. Meanwhile, the percentage of investors who have put on protection against “a sharp fall in equity markets” saw its biggest one-month jump on record.
The first week of February also saw record outflows from stock funds.
Related: Why ETFs can’t be blamed for the correction or volatility in stocks
Separately, allocation to bonds was at a record low of 69% underweight, while the average cash balance of the fund managers surveyed rose to 4.7% from a five-year low of 4.4%.
“While this month’s survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all clear to buy the dip,” Michael Hartnett, BofA Merrill Lynch’s chief investment strategist, said in a press release.
https://www.marketwa...high-2018-02-13
