Each month, Bank of America/Merrill Lynch (BAC) releases the Global Fund Manager Survey, and it usually makes interesting reading. It is a poll of 225 money managers, who collectively control around $645 billion, on their view of current conditions. Knowing how they view the economy and the market is obviously useful, but it does have its limitations. By definition, it is backward looking, so you cannot know if views have changed by the time you read the report. When opinion is divided, that isn’t too much of a problem, but when it is united, as is the case right now, it can be.
This month’s survey showed remarkable unanimity. Over 90% of those polled believe that we are in a V-shaped recovery and that this will be a good year for the market, while only 13% believe stocks are in a bubble. The small overlap in the Venn diagram of those views is where I would be personally: believing that we are in a bubble of sorts, but also that it can continue. That is obviously a minority view, though, and the point here is to look at what the majority believe, and what it means for stocks from here.
The report was accompanied by a note to investors from BofA/ML's Chief Investment Strategist, Michael Hartnett, who wrote, "The only reason to be bearish is…there is no reason to be bearish." That is the classic contrarian argument, that if everyone agrees on a trade, the best trade to take is its opposite. If you are a regular reader of Market Musings you will know that that would usually appeal to me given my contrarian bent, but this time is different.
There is an obvious danger in that level of agreement. Because of the bullishness, average cash allocation in these funds is down to 3.8% which prompts the question of where the money will come from to buy stocks and push markets up from here. The answer is from you and me, the retail investor. The $645 billion controlled by these money managers is a big chunk of change, but it pales in comparison to the trillions of dollars individual American investors have sitting in cash.
That doesn’t mean that all that money is destined for the market. After experiencing the events of 2008/9 and the selloff last year, it should be no surprise that people want the security of a large cash balance, and some will never again be fully committed to stocks. However, eventually FOMO, the fear of missing out, will come into play. Even with the recent rise in interest rates, holding cash doesn’t offer any real return at all. That is bearable if the market is just edging higher, but the 20% or so gains in the S&P 500 from the end of October to the high last week will have had a lot of people regretting holding so much cash.
I hate to break it to you if you are sitting on a lot of cash right now, but it is an old adage among traders that the top comes just after reluctant retail investors have been convinced to join in with a bull run. The thing is though, we are not there yet. That will probably happen when the economy begins to catch up to the market, when vaccination numbers grow, unemployment falls further, and strong growth returns. Then, the feeling that the market was right all along will force the holdouts to buy. That will be the time when the real contrarian trade set up.
Until then, the message from the survey of fund managers is exactly what it appears to be. They are almost all bullish for a reason, and that reason holds up to scrutiny. Sometimes a cigar really is just a cigar.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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