Investors are getting closer to the point of capitulation as expectations for plummeting global growth and a hostile market environment could mean a bottom is near, according to the latest Bank of America Global Fund Manager Survey. The closely watched sentiment gauge for Wall Street professionals shows that the outlook in October for the global economy is around an all-time low, and allocation to cash is at multi-decade highs. For the third prong of BofA’s capitulation test, the policy outlook also is getting closer, with respondents seeing interest rate cuts and lower bond yields ahead. However, the bottom does not appear in the bank’s gauges yet. Taken together, the results provide “tasty morsels for another bear rally (so long as [Treasury] yields stay < 4%); we still say ‘big low’, ‘big rally’ in H1’23 when Fed cuts become consensus,” Michael Hartnett, the bank’s chief investment strategist, said in an accompanying narrative with this month’s survey results. The final part of the capitulation equation is proving elusive. Federal Reserve officials have expressed doubt about the possibility of rate cuts in 2023, insisting they expect to keep monetary policy restrictive so long as inflation remains well above the central bank’s 2% goal. Current market pricing is pointing to another 1.75 percentage points worth of rate hikes through February, with the chance of the first decrease happening around September 2023, according to CME Group charting . Respondents see the Fed’s “terminal rate,” or the level where it will stop raising rates, at 4.38% — which is below the central bank’s own 4.6% estimate released in September . However, investors are much closer to peak-fear capitulation when it comes to the economy and market outlook. A net 72% of survey respondents see global growth declining over the next year, just off the all-time low. Cash allocations, meanwhile, are up to 6.3% of portfolios, the highest since April 2001. At the same time, respondents see inflation falling. “But while the stock market was immune to the bleak sentiment till last month, it has started to better reflect investors’ pessimism,” Hartnett wrote. However, he also noted that the rising pessimism has still been met with positive flows to equity funds, “suggesting no sign yet of capitulation from retail/institutional investors.” The survey indicated the most crowded trade to be long the U.S. dollar, followed by short U.S. stocks and long ESG assets. Investors continue to view inflation as the biggest tail risk. The October survey entailed 371 panelists with $1.1 trillion in assets under management.
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