Stocks continued to advance last week, with the S&P 500 hitting its highest level since early March. However, while US equities have now recovered almost two-thirds of their coronavirus-related losses, fund managers continue to think we are in a bear market rally. The latest Bank of America fund manager survey is striking in its pessimism. Just 10 per cent expect a V-shaped economic recovery, compared to 75 per cent who envisage a U- or W-shaped recovery. Only 25 per cent think this is a new bull market, while 68 per cent think it's a bear market rally.

Cash levels are way above their 10-year average and remain in touching distance of their highest level since the 9/11 terrorist attacks of 2001. The bank's Bull & Bear Indicator is at 0, denoting extreme levels of bearishness. It's important to remember the survey is viewed as a contrarian indicator; extreme bearishness means many investors are not positioned for unexpectedly good news. Of course, stocks are technically over-bought right now, but the survey bears out a recent Morgan Stanley note which pointed to cautious investor sentiment as a reason to expect stocks will not now record sharp declines.

Both retail and institutional investors are “conservatively invested”, the note said, “with cash on the sidelines that would likely be put to work in a sell-off, potentially creating a floor under stock prices”. Or, as Bank of America puts it, the “pain trade” for stocks is still up.