Stocktake: Fearful investors are still buying stocks

Bank of America’s (BofA) fund manager survey might suggest investors are spooked, but not everyone agrees sentiment has hit a bearish extreme.

The problem, say Sanford Bernstein analysts, is that while investors may say they are pessimistic, they aren’t acting on this pessimism. Specifically, money has continued flowing into global equity funds this year, with Bernstein finding no evidence of investor capitulation.

With the exception of Europe, outflows “have only just begun”.

Other analysts have made the same point recently, noting the obvious disconnect between investor sentiment and investor behaviour. It may be that this will change in the event of an especially poor earnings season.

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Morgan Stanley’s head of wealth management, Lisa Shallett, remains cautious on that front, saying analyst forecasts are too sanguine and that a profits recession is “inevitable”. Similarly, while BofA’s Michael Hartnett refers to dire sentiment as a likely driver of a near-term market rally, he cautions that a major market bottom may prove elusive.

Stocks may endure “proper capitulation” in the event of a poor earnings season, says Hartnett, who says a mild recession has been priced in. The S&P 500 has enjoyed a decent rebound since bottoming at 3,637 last month, but those lows may be revisited if the economic outlook darkens further. As Hartnett puts it, nibble at an S&P 500 of 3,600, bite at 3,300 and gorge at 3,000.