Even as stocks have performed strongly thus far in June, institutional investors have been flipping from overweight to underweight equities at levels not seen since March 2009.
While their underweight positioning to global equities fell to a 10-year low, global fund managers also stockpiled their allocations to cash to the highest level since August 2011. And highlighting the trend this month of yield compression in eurozone developed market sovereign debt and that of U.S. Treasury notes and bonds, being long U.S. Treasuries is currently the most crowded trade, replacing U.S. technology stocks, according to the most recent Bank of America Merrill Lynch Global Fund Manager Survey.
“FMS [fund manager survey] investors have not been this bearish since the Global Financial Crisis, with pessimism driven by trade war and recession concerns,” Bank of America’s chief investment strategist Michael Hartnett, said of the results cited here. With so much cash not put to work and fund managers surveyed strongly allocated to U.S. Treasury securities, Harnett noted that the “tactical pain trade” of missing out would be higher yields and higher stocks.1
The 179 fund managers with $528 billion in total assets under management were surveyed between June 7 and 13, and reflected some of those concerns in their responses. Approximately 56% cited the trade war as the top “tail risk,” while 87% of the fund managers said the economy is at the “late-cycle” point, the highest reading recorded for the survey.
While the so-called “pain trade” could have potentially worsened if the Federal Reserve had cut interest rates, no such actions from the U.S. central bank emerged on Wednesday, June 19. Instead, the Fed kept its key overnight benchmark lending rate unchanged at a range of 2.25% to 2.50%.
The Federal Open Market Committee (FOMC) said it expected the economy’s expansion to continue but “uncertainties about this outlook have increased,” it said in its statement. “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”2
Mixed Market Signals?
Stocks and bonds have both performed well this month, a trend that doesn’t always happen. Despite significantly lower bond yields in developed economies including France, Germany, the U.S. and even Italy indicating slower global growth, deflation and trade concerns, riskier assets like stocks continue to rise.
As of the market close on Tuesday, June 19, the Dow Jones Industrial Average and the Nasdaq Composite were each up by 6.7% for the month thus far, while the S&P 500 has risen by 6.0%. While stocks have surged, Treasury yields have also fallen, a market dynamic that’s sent mixed signals. For the same timeframe, the U.S. 10-year Treasury note’s yield was at 2.057%, compared to 2.130% at the end of May.
Speaking with Yahoo Finance, Bank of America’s Hartnett noted that the strength of corporate credit and the resilience of the U.S. consumer have been key factors underpinning stocks’ strong gains. This year through June 17, the effective yield of investment grade U.S. corporate date, which includes reinvested coupon payments, has fallen to 3.39%, down from 4.25% as of December 31, based on the ICE BofAML US Corporate Master Index.
Consumer confidence, meanwhile, remains strong, posting another increase in May as tracked by the Conference Board. It said confidence levels are again near those of last fall when the Consumer Confidence Index was hovering near 18-year highs. These high levels of confidence “suggest no significant pullback in consumer spending in the months ahead,” Lynn Franco, the Conference Board’s senior director of economic indicators, said in late May.3
Stock prices have also performed well even as the potential for an earnings recession is growing as the second quarter comes to a close, following the first quarter’s decline. Year-over-year earnings for companies in the S&P 500 are forecast to decline in the second quarter by 2.5%, according to FactSet Research Systems Inc. Company earnings for the S&P 500 haven’t declined for two consecutive quarters since the first half of 2016.4
1 La Roche, J. (2019, June 18). Fund managers haven’t been this bearish since the financial crisis thanks to the trade war. Yahoo Finance. Retrieved from: https://finance.yahoo.com/news/fund-managers-most-bearish-since-crisis-112100919.html
2 The Federal Reserve. (2019, June 19). Federal Reserve issues FOMC statement [Press Release]. Retrieved from: https://www.federalreserve.gov/newsevents/pressreleases/monetary20190619a.htm
3 The Conference Board. (2019, May 28). The Conference Board Consumer Confidence Index Increased in May [Press Release]. Retrieved from: https://www.conference-board.org/data/consumerconfidence.cfm
4 Butters, J. (2019, June 14). Earnings Insight. FactSet Research Systems Inc. Retrieved from: https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_061419.pdf
Sources for Market Data:
Dow Jones Industrial Average:
U.S. 10-Year Treasury Note:
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