Bank Of America Asked 300 Fund Managers When We'll See The "Big Low"...

Bank Of America Asked 300 Fund Managers When We'll See The "Big Low"...
Jonathan Hobbs

over 1 year ago4 mins

  • Bank of America surveyed over 300 fund managers for October. Generally, institutional investors are at maximum bearishness on the economy: anticipating weak economic growth and a cooldown in the red-hot levels of inflation in the next 12 months.

  • Most investors think the Federal Reserve will stop raising interest rates in the first quarter of 2023, with its key rate topping between 4.5% and 5%.

  • Most indicators suggest stocks are close to a “big low”, but survey responses suggest another bout of selling before the next big rally.

Bank of America surveyed over 300 fund managers for October. Generally, institutional investors are at maximum bearishness on the economy: anticipating weak economic growth and a cooldown in the red-hot levels of inflation in the next 12 months.

Most investors think the Federal Reserve will stop raising interest rates in the first quarter of 2023, with its key rate topping between 4.5% and 5%.

Most indicators suggest stocks are close to a “big low”, but survey responses suggest another bout of selling before the next big rally.

Mentioned in story

Bank of America (BofA) released its latest Global Fund Manager Survey (FMS), which reveals what 300 investment pros are thinking about the economy and the markets. It’s a mammoth document with no fewer than 59 charts – so I’ll just give you the important stuff here, and let you know what it means for your investments…

What do fund managers think about the economy?

Here’s the bad news: fund managers are about as pessimistic as ever on economic growth, with 72% expecting it to be weaker a year from now (dark blue line) and 79% seeing a global recession sometime in 2023. The good news is that this type of max bearishness often happens before major stock market rallies, with the light blue line showing the yearly percentage return of the S&P 500 from each point in time. After some of those red circles of peak economic dread, US stocks have had good stretches ahead.

Bank of America survey October FMS investors economy

It makes sense that we’d see something similar happen this time around. For one thing, investors have often seen the best returns in stocks when they bought in during times of peak economic fear. For another, the BofA survey suggests that global inflation – which was 9.8% in September – is finally topping out, with 79% of the respondents expecting that number to come down over the next 12 months.

With the prospects of both inflation and economic growth winding down, what do you get?

Greater potential for a Fed pause or pivot, where the US central bank stops raising interest rates or even lowers them. See, the Fed has been raising interest rates at an aggressive pace this year, in a bid to cool down spending – hoping to tame the country’s red-hot inflation in the process. And 38% of fund managers expect the Fed to end those rate hikes in the first quarter of 2023 – the most out of any other quarter. They also generally see the central bank’s benchmark interest rate peaking somewhere between 4.5% and 5% when it finally takes its foot off the gas, up from the current 3% to 3.25%.

Bank of America survey October FMS investors Fed

About half the fund managers believe the Fed will pause or even cut interest rates because inflation – as measured by the personal consumption expenditures (PCE) index – will drop below 4%. But the other half thinks the Fed might be forced to change its direction because of something more calamitous happening: a global credit crisis, for example, or a big jump in US unemployment.

Bank of America survey October FMS investors credit event

So what’s the opportunity here?

The survey shows that several “investor capitulation” boxes have now been checked, suggesting a “big low” in stocks is nigh. For example, fund managers are now holding more money in cash (6.3%) than at any point since 2001, and about half of them are holding less in stocks than usual. These are both signs of max bearishness – the kind of stuff you usually find at the bottom of a market cycle.

Still, there is more in this survey that would suggest the bottom is not yet in. For example, investors have still been sending money to fund managers in the past three months to put to work in the stock market. If investors were really that panicked, they’d be taking money out of those funds instead. That would show capitulation – where investors give up en masse, basically throwing in the towel at the worst possible time. Since that hasn’t happened, the survey suggests there’s probably one last washout ahead – before a rally in early 2023.

But even if there is one last shakeout before the next big rally, the general picture is still pretty clear when reading between the lines: we’re probably close to the lows, so now would be a good time to be buying into stocks that you think will do well in the long run. And on that front, fund managers are most optimistic about stocks from Japan, then (in order) emerging markets, the US, Europe, and the UK. On the one hand, it might pay off to go with the consensus here and pick up some Japanese stocks (I wrote about those here). On the other hand, you could consider being contrarian, and if so, you might want to check out Luke’s piece on investing in UK stocks. Or you could cover the globe with the iShares MSCI World ETF (ticker: URTH, expense ratio: 0.24%).

Geography aside, more than half the managers think stocks with quality earnings and good dividend yields will do better in this environment. For a US-focused option, consider the Vanguard High Dividend Yield ETF (VYM, 0.06%). Or for worldwide exposure, look into the Vanguard International High Dividend Yield ETF (VYMI, 0.22%). The globally focused ETF is not dollar-hedged, which means foreign-denominated dividends and returns would rise in dollar terms if the greenback weakens against other currencies. And given the survey says the US dollar is “by far” the world’s most crowded trade right now, that might only add to its allure – especially if you’re contrarian. There’s also Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL, 0.29%) if you’re based across the pond.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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