While Wall Street investors may be clinging to hope that central bankers won’t screw up the tightening process, i.e., commit a “policy mistake”, which as we showed earlier is the biggest tail risk on Wall Street today…
… and won’t blow up what is by now the biggest consensus position perhaps in history, namely everyone (including the Harvard Endowment) being long FAANG+BAT…
… Wall Street has now given up on the so-called “coordinated global recovery”, and as BofA’s Michael Hartnett reveals in his latest Fund Managers Survey polling 223 respondents with $643BN in AUM, expectations for faster global growth have collapsed, with only net 1% of investors indicating in May they think the global economy will strengthen over the next 12 months. This is down 4% from April and the lowest level since February 2016 when the S&P hit an intraday low of 1810 and when global economy was just emerging from its China-deval/Quantitative Tightening led turmoil. The fact that this is happening now when both the economy and the markets have been firing on all cylinders is especially troubling.
Looking ahead, while only 18% expect a recession in the next 12 month, (and 2% expect it in 2018), a fully 84% are now confident the next recession will hit in the next two years, either in 2019 (41%) of 2020 (43%).
Meanwhile, looking at positioning, BofA notes that the market froth is now gone, expectations have reset, cash remains high explaining the May rally, but consensus still positioned for risk-on and expects: “good” rise in rates, no recession until 2020’Q1.
To this, BofA’s response is “Buy In May And Sell The Rip” as growth and credit weakness will be the likely triggers for the next move lower. Here is Hartnett:
“This month’s survey presents good and bad news,” said Michael Hartnett, BofA chief investment strategist. “Although cash levels remain high and growth optimism is at the lowest level in over two years, a majority of investors say there is room to grow in this equity bull market and don’t see signs of recession anytime soon. Fund managers think the May rally can extend in the near-term.”
Meanwhile, here are the other notable observations from the latest Fund Manage Survey:
Average cash balance ticks down to 4.9% in May, from 5.0% in April, but still above the 10-year average of 4.5%, continuing the FMS Cash Rule contrarian “buy” signal. This also means that the near-term BofAML Bull & Bear Indicator is more neutral now at 4.8 (close to the midpoint between the 2.0 “buy” and 8.0 “sell” thresholds). This is the good news, although it the June FMS cash falls < 4.6%, that would be a sell signal.
The not so good news is that while funds still have dry powder on the side, and are looking for a near-term bounce, Hartnett notes that the bank’s proprietary Global FMS Macro Indicator has fallen for the sixth straight month, sliding into negative territory for the first time since November 2016. This comes alongside the abovementioned expectations for slowing global growth with just net 1% of investors indicating they think the global economy will strengthen over the next 12 months; this is the lowest level since February 2016.
More bad news: corporate margin expectations have also peaked, and in May slumped to the lowest level since late 2016; falling 8% to net 19% thinking operating margins will fall in the next 12 months. This explains why despite the fantastic beats in much of Q1 earnings season, stocks have failed to find new highs.
Even more bad news: FMS profits expectations slump to post-Brexit lows of just 10% expecting faster growth over the next 12 months; the historical relationship implies defensives set to outperform cyclicals in coming months.
Meanwhile, suggesting stagflation is just around the corner, higher inflation remains the consensus view, with net 79% of investors surveyed expecting core CPI to rise over the next 12 months, slightly down from 82% last month.
In keeping with the reflationary theme, BofA finds that allocation to commodities stays at net 6% overweight, the highest since April 2012 when WTI was $105/bbl. To BofA this is indicative of “Commodity chasing” and even though the allocation to commodities is at a 8-year high, the energy/materials positions is still playing catch-up with #1 “pain trade” of 2018 YTD: long commodities.
Even more bad news: 76% say equities have yet to peak -the majority say not until 2019 or beyond; only 19% think January marked the top – suggesting fundamentally-driven selloffs will be met with BTFDing dragging the market even more from fair declining value…
… while a third of respondents say companies are now too levered, the highest since Dec’09.
Meanwhile, as confidence in the economy is crumbling, the buyside is hoping that growth stocks will preserve their beating ways, and as we showed earlier, the top “crowded trade” is long FAANG+BAT (short Treasuries is #2).
What can shake the consensus view? According to BofA, a weak Q2 GDP in the US or a “bad” rise in rates (watch US bank stocks); coupled with credit contagion from EM (watch Brazil FX).
As for the best contrarian trade, BofA recommends shorting banks, and going long utilities, driven by lower bond yields.
To summarize: the growth narrative is now officially dead, Wall Street is starting to cash out, but most remain hopeful that they have time before the next recession hits some time in 2019 or 2020, and since the market has not peaked just yet, at least according to the vast majority, most investors are hoping for “one final hit” in the market – perhaps at the next all time high in the S&P – at which point the collective dumping will begin.