Investors Most Overweight Cash Since Financial Crisis Despite Rally

Big investors are remarkably skeptical about the sustainability of the dramatic stock rally since December. Leading investment managers with a collective $515 billion in assets (AUM) are swapping stocks for cash, per Bank of America Merrill Lynch's latest Global Fund Manager Survey, as highlighted in the table below.

Big Investors' Lack Of Faith In Stock Rally

• Overweight net cash allocations at highest level since financial crisis
• Global equity allocations are lowest since Sept. 2016
• 34% of those surveyed say S&P 500 won't regain Sept. 2018 peak

Source: BofAML Global Fund Manager Survey, Feb. 2019

Significance For Investors

Among the investment managers surveyed by BofAML, the percentage who believe that the S&P 500's record high close of 2,931 in Sept. 2018 was the bull market peak has jumped from 11% to 34% between then and now. Also, BofAML calculates that respondents' net cash allocations are overweight by 44% in February, up from 38% in January, and now represent "the biggest overweight since the depths of the Global Financial Crisis in Jan. '09."

Survey respondents' preferred long positions are in cash, pharmaceutical and consumer discretionary stocks, emerging markets, and REITs. Their biggest shorts are in cyclical sectors, most notably energy and industrial stocks.

However, looking just at cash balances without reference to benchmark allocations paints a less extreme picture. Cash holdings by respondents are 4.8% of their portfolios now, versus a 10-year average of 4.6%.

The rising caution among fund managers can be a contrarian buy signal, per a note from BofAML strategists led by Michael Hartnett. "Bearish investor positioning remains first-quarter positive for asset prices," they write, per Bloomberg.

Quint Tatro, chief investment officer (CIO) at investment advisory firm Joule Financial, is a doubter. Based on technical analysis, he cites 2,800 as a resistance level for the S&P 500, per remarks on CNBC. He sees "a bigger bear trend, not a new bull market," and expects the December lows to be revisited.

The BofAML survey indicates that expectations about global economic growth grew "modestly" in February, but "from extremely low levels." Indeed, two-thirds of those surveyed still anticipate slowing growth in the next 12 months, and many are rotating their portfolios to protect against "secular stagnation." They want companies to reduce leverage, while their desire for stock buybacks and dividends are at an all-time low.

Nobel Laureate economist Paul Krugman believes that the U.S. economy may be headed into a recession and "the underlying backdrop is that we have no good policy response," per another Bloomberg report. Critiquing the Fed, he said, "Continuing to raise rates was really looking like a bad idea."

In addition to cash, record inflows are going into emerging market bond ETFs. "Demand for emerging markets assets has exploded as the Fed has turned dovish," observes David Santschi, director of liquidity research at TrimTabs Investment Research, in a press release. "Traders are playing the Powell put aggressively," he added.

Emerging market bond ETFs added $900 million of assets during the five trading days ending Feb. 8, 2019, and a record $1.5 billion during the five trading days ending Feb. 5, per TrimTabs. During these same two time periods, the respective inflows to emerging market equity ETFs were $2.7 billion and $3.5 billion. The latter figure was the biggest five-day inflow since April 2014, TrimTabs notes.

Looking Ahead

It's too early to determine the significance of these huge inflows into both emerging markets and cash. In the case of cash, it's open to interpretation regarding whether rotations from equities to cash are signs of trouble ahead for stocks, or merely reassuring prudence. Ultimately, the direction of the U.S.-China trade war, the economy and corporate profits may give investors an answer.