Last August, when looking at the monthly Bank of America Fund Manager Survey, we pointed out a “paradox” in Wall Street sentiment that could only be attributed to schizophrenia (or merely another example of how central banks have broken markets): on one hand a record number of investors said that stocks are overvalued (they were correct), even as most investors admitted they – or their peers – are long tech stocks (they were also correct).
Fast forward to today, when the same “schizophrenic”paradox is back as the latest, June, Fund Manager Survey reveals a set of responses that make little intuitive sense when juxtaposed.
On one hand, of the 235 survey respondents with $684BN in AUM, a record 42% of investors said companies are over levered, far exceeding the 32% peak in 2008; overall an all-time high of net 34% think corporate balance sheets are overleveraged.
According to BofA CIO Michael Hartnett, “this implies downside for equities versus government bonds” as the net percentage of “improve capex” tracks global equities and bonds closely.
Paradoxically (again), 64% of respondents think the US has the most favorable outlook for profits, a 17-year high; all other regions have net negative profit outlooks, making the US the cleanest dirty shirt once again.
In other words, the smartest traders in the world no longer worry about debt. Why? Because as the following chart from Goldman shows, with net leverage rising to all time highs the market refuses to reward strong balance sheet companies and instead continues to pile ever more cash into “weak balance sheets” for the simple reason that the Fed has pushed all investors into the worst possible sources of alpha (or beta) and if things turn south, the Fed will just bail everyone out again as usual.
So with record debt “clearly” no longer a risk, investors are flocking to the one place in the world where there is still some growth (thanks to Trump’s fiscal stimulus, and even more debt): the US. In fact, BofA goes so far as to take out the “decoupling” narrative out of cold storage, and that’s how Hartnett describes respondent re-allocation to US equities, which climbs 16% to a net 1% overweight, the first time investors surveyed have gone overweight in 15 months…
… with 2/3 investors saying US has the best corporate profit outlook, a 17-year high.
“Investors have their eyes on the US this month,” said Michael Hartnett, chief investment strategist, “with a record high favorable outlook for profits and a return to US equity allocation. Decoupling is back in vogue.”
Meanwhile, expectations for faster global growth continued to fade, with just net 1% of investors indicating they think the global economy will strengthen over the next 12 months, barely above the boom/bust threshold and still at their lowest level since February 2016. Surely a time to chase the all time highs in the S&P…
Of course, since it is very late in the cycle, it’s not just equities, and according to the ssurvey, allocation to commodities hits a new 8-year high, rising 1ppt to net 7% overweight, the highest since April 2012 when WTI was $105/bbl.
But the clearest indicator that Wall Street again has entered the paradox zone, is that with respondents once again dumping all their cash into high growth, “story” tech stocks, Wall Street admits that “Long FAANG+BAT” remains the most crowded trade identified by investors for the fifth straight month and most crowded trade outright since “Long USD” in January 2017; the top three in June are rounded out by “Short US Treasuries” (16%) and “Long USD” (9%).
Finally, for those curious what keeps (schizophrenic) Wall Street up at night, in June the most commonly cited tail risk to the markets is a trade war (31%), followed by a Fed/ECB hawkish policy mistake (26%) and a Euro/EM debt crisis (23%); trade tensions have been the dominant macro concern for investors in 2018
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