Even though the S&P 500 is trading at lofty levels, skittish investors don't believe the good times will last and instead are preparing for the worst. They've shifted $322 billion into money market funds during the past 6 months, in the biggest flight to safety since the 2008 financial crisis, Bloomberg reports. Meanwhile, the latest release of the Global Fund Manager Survey by Bank of America Merrill Lynch reveals that leading investment managers around the world also are getting nervous, reporting that their holdings of cash, defensive stocks, and bonds are at historically high levels, with cash topping the list.

Investors are suffering from “bearish paralysis" resulting from worries about the trade war, Brexit, the Trump impeachment investigation, and the possibility of a recession ahead, strategists at BofAML led by Michael Hartnett write in a recent note to clients, as quoted in another Bloomberg article. In just the 7-day period through Oct. 9, they observe that global equity funds saw $9.8 billion of net withdrawals, while bond funds recorded $11.1 billion of net inflows.

Key Takeaways

  • Leading global investment managers are increasingly cautious.
  • They have overweight positions in cash, defensive stocks, and bonds.
  • Money market funds are seeing the biggest inflows since the 2008 crisis.
  • Worries about economic growth and trade are high.

Significance For Investors

According to the BofAML survey, the top 3 overweight positions being taken by global fund managers today, relative to history, are in cash, REITs, and consumer staples stocks. The poll was conducted from Oct. 4 through Oct. 10, with 175 participants who collectively have $507 billion of assets under management (AUM).

Roughly 33% of respondents expect the global economy to decelerate over the next 12 months, thus leading to their increasingly defensive portfolio positioning. A string of disappointing releases of economic data by the U.S. government in early October appears to have stoked the bearish sentiment, Bloomberg observes. On the bullish end of the spectrum, respondents indicated that a clear resolution of the U.S.-China trade war would be the most positive development for equities right now.

Observing that there is "so much handwringing" about the stock market, Mary Callahan Erdoes, CEO of JPMorgan Asset and Wealth Management, also noted that "so much money is going into bonds ... any kind of fixed income," during an institutional investor conference, as quoted by Business Insider. She believes that investors are becoming unduly bearish about the U.S. economy, about which she said, "everything looks fine."

Largely based on her analysis of JPMorgan Chase's own massive base of clients, Erdoes observed that the value of car loans relative to income is at an all-time low, as is the share of people who pay less than 2% of their credit card debt, while a record number of people are using auto pay for their credit cards, apparently unconcerned about overdrafts. With the unemployment rate at a 50-year low, and more job openings than unemployed people, she saw added reasons for optimism.

Looking Ahead

BofA strategists agree with the bullish view. “If trade war and Brexit fears are unrealized in the fourth quarter, then macro can beat expectations, validating our contrarian bullish view,” writes BofA strategists led by Hartnett, as quoted by Bloomberg. They add that their “irrationally bullish” contrarian view results from the “bearish positioning, desperate liquidity easing, and ‘irrational contagion’ from bond bubble to equities.”