Investor optimism has surged, as revealed in the June Bank of America (NYSE:BAC) Global Fund Manager Survey. This sentiment has led to increased investments in riskier assets like stocks, causing cash levels in portfolios to drop to just 4%—the lowest since June 2021. Specifically, 32% of funds from money-market allocations are now directed to U.S. stocks, while 19% are invested in global stock markets.
Bull and Bear Indicator
The survey’s Bull and Bear Indicator, which measures sentiment through cash levels, equity allocations, and economic growth expectations, has hit its most bullish point since November 2021. However, Bank of America (BofA) notes that global risk sentiment remains “not yet extreme,” with the indicator at a moderate level of six out of ten. This is significant because extreme positive sentiment can be bearish; once everyone is “all in,” there’s no new cash to drive prices higher.
As 2024 nears the halfway point, major indexes such as the S&P 500 (SPX) and the Nasdaq Composite (IXIC) just hit fresh records. Both indexes have posted returns in the high teens so far this year.
Market Optimism Is Strong
A key driver of the surge in optimism is the improved outlook for the global economy. Only 6% of respondents expect weak global economic growth, a significant improvement from the 9% who predicted a weak economy last month. Additionally, an overwhelming 73% of investors do not foresee a global recession on the horizon.
Causes for Investor Concern
Some nail-biting has not abated, despite the overall positive sentiment. Inflation continues to top the list of concerns for 33% of fund managers, followed by geopolitics at 22%, and the November U.S. election at 16%.
Speculating on a Fed Interest Rate Move
The survey also reveals that investors are betting on the Federal Reserve to lower interest rates. This expectation is likely fueling the move towards riskier assets as investors seek higher returns.
In surprising contrast to the message presented after the last FOMC meeting, the survey reveals that eight out of ten investors expect two, three, or more rate cuts from the Fed over the next 12 months. Nearly 40% forecast the first rate cut will occur at the Fed’s September 18th policy meeting.
Key Takeaway
Sky-high optimism, sprinkled with minor concerns, is now the order of the day in financial markets. The continuous push into new highs on the major indexes demonstrates this.
As fund managers continue to shift from cash to equities, time will tell if this “risk on” sentiment will be sustainable amid ongoing economic uncertainties.
