With the S&P 500 having dropped 18% so far this year, experts are mixed as to whether there’s another shoe to drop or a rebound is coming.
Results from the Bank of America’s July fund manager survey skew strongly toward the bearish view. In what BofA strategists call “full capitulation,” the survey “shows a dire level of investor pessimism,” they wrote in a description of the poll.
“Expectations for global growth and profits are at all-time lows, cash levels are the highest since October 2001, and equity allocation is at the lowest since Lehman Brothers’ [meltdown in 2008].”
Further, the BofA bull & bear indicator remains maximum bearish at zero. Fundamentals are seen as “poor” for the second half.
To be sure, sentiment indicates a stock and bond rally will arise in coming weeks, the strategists said. Presumably it is expected to be brief.
Recession Ahoy
Fund managers’ anticipation of recession is at the highest level since May 2020, early in the covid pandemic. A total of 76% of survey respondents expect inflation to fall, the highest percentage since the financial crisis of 2008-09.
“But the mood is still stagflationary," the strategists said. The fund managers expect the Federal Reserve to raise interest rates another 1.5 percentage points.
It has lifted rates by that same amount since March and has indicated it will likely boost rates by 0.75 percentage point next week.
As for asset allocation, “the most crowded trades are No. 1, long U.S. dollar and No. 2, long oil/commodities,” the strategists wrote. While fund managers are avoiding stocks in general, they are long defensive equities, such as staples, utilities and healthcare.
Individual Investors Bullish
Meanwhile, retail investors appear to have a much different attitude toward stocks than the fund managers BofA surveyed.
In April to June, individuals snapped up a net monthly average of $25 billion of U.S.-listed stocks and exchange-traded funds, according to Vanda Research, as cited by The Wall Street Journal. That creamed the $3 billion monthly average for the pre-pandemic period of April to June 2019.
Buying stocks now certainly makes sense for long-term investors under the age of 40 who know they won’t need the money soon. That’s because if stocks’ history repeats, the market is unlikely to fall for more than a few years and highly unlikely to drop for more than 10 to 15 years.
But for investors over the age of 60, it’s a different story. They may need to sell some stock soon after they retire to finance their spending. And if the markets keeps falling, these investors may have to unload some shares at a loss.
