When it comes to government spending, money managers are growing increasingly cautious of its impact on the market. According to the latest survey by Bank of America, a net 24% of the 295 panelists with $736B in assets under management believe that monetary policy is too restrictive, marking the highest level since November 2008. Additionally, 31% of the respondents feel that fiscal policy is too stimulative.
This policy mix has been deemed as bearish for bonds and bullish for the U.S. dollar. Michael Hartnett, a strategist, states that this combination is “as bond bearish, U.S. dollar bullish ‘as it gets.'”
In light of the 10-year Treasury yields reaching levels not seen since 2007, 50% of the surveyed fund managers believe that the rise in bond yields is driven by high government debt and deficits, while only 32% attribute it to strong nominal economic growth. Hartnett suggests that government deleveraging would have a positive impact.
But it’s not just government finances that are causing concern. Corporate balance sheets have become a worry as well. A whopping 53% of fund managers express the desire for improvement in corporate balance sheets, which is the highest level since May. They prioritize this over capital spending, which only 25% see as important, and returning cash to shareholders, which only 15% value.
It is interesting to note that a strong focus on balance sheet repair has historically been associated with elevated recession risk. In March 2009, 71% of FMS investors wanted to see companies reduce leverage, and in April 2020, this number increased to 79%. In October 2022, 60% of investors sought balance sheet repair.
Since September, fund managers have become more bearish, with cash levels rising from 4.9% to 5.3%. This triggers a buy signal in the BofA Global FMS Cash Rule. If we look back to 2011, following this buy signal would have resulted in S&P 500 returns of 2% in the two months after, 4% in the three months after, and 7% in the six months after.
When it comes to the biggest tail risks, high inflation, which keeps central banks hawkish, remains at the top of the list with 31%. Geopolitical tensions come second, but have risen to 23%, followed by concerns about a global recession or hard landing at 21%.
In terms of crowded trades, long positions in big tech stocks are still considered the most crowded, followed by short positions in Chinese equities and long positions in Japanese equities.