The only reason to be bearish at the moment, says Bank of America's (BofA) Michael Hartnett, is that there is no reason to be bearish.
Hartnett is referring to investors’ increasingly euphoric outlook, as evidenced by the bank’s latest monthly fund manager survey. Nine months ago, roughly three times as many investors expected the economic recovery to be U-shaped rather than V-shaped; today, a V-shaped recovery is the consensus.
A record number expect a stronger global economy in 2021, while both yield curve and earnings expectations are close to all-time highs.
The fact that an awful lot of good news is already baked into market prices isn’t worrying investors. Although various valuation metrics indicate this is the second-most expensive market in history (behind the late 1990s technology bubble), only 13 per cent think US equities are in a bubble. A majority (53 per cent) think this is a late-stage bull market, while 27 per cent think this is an early-stage bull market.
As a result, cash is seen as trash, with allocations falling to their lowest level in eight years. Optimism on stocks is at its second-highest level in history, with equity allocations now at their highest level in 10 years. Worryingly, the percentage of investors taking higher-than-normal risk has hit all-time highs.
Overall, BofA’s Bull & Bear Indicator is at 7.7, just shy of the 8.0 reading that triggers BofA’s sell signal on account of it marking a bullish extreme. With the MSCI World Index coming off a recent run of 12 consecutive daily gains – the longest winning streak in 17 years – BofA’s survey is further confirmation that things are heating up.
