Stocktake: Fund managers may not be bearish enough

Fund managers are bearish, but not bearish enough. So says Bank of America, whose latest monthly fund manager survey shows an obvious downturn in sentiment.

Cash levels have spiked to their highest level since May 2020. This dash to cash will be noted by contrarians, as cash levels are now at levels associated with above-average one-, three- and six-month returns.

There are other signs of caution. Global growth expectations have hit their lowest level since March 2020. Equity allocations have plunged over the last month. Liquidity conditions have deteriorated to levels unseen since May 2020.

Furthermore, investors don't expect the Federal Reserve to run to the rescue any time soon, saying central bankers are unlikely to step in unless the S&P 500 falls below 3,700. That's 23 per cent below January's peak – bear market territory.

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That said, investors aren’t panicking. Although equity allocations have plunged from last month, they remain in line with historical norms. Investors remain long cyclical stocks. Bank of America’s Bull & Bear Indicator is flat; at 4.2, it is well shy of the 2.0 level that triggers a contrarian buy signal.

Importantly, investor probabilities of a credit event (3 per cent), recession (12 per cent), and bear market (30 per cent) are low – too low, says Bank of America strategist Michael Hartnett, who says stocks are at risk of further falls.