Talk about pessimism. The monthly Bank of America Global Fund Manager Survey shows “investor sentiment close to levels of pessimism seen at lows of past 20 years,” according to the survey. More than half (51%) expect weaker global growth. Sixty percent think interest rates will be lower 12 months from now — not higher. Global Fund Manager Survey Expect weaker global growth: 51% Inflation going lower: 84% Rates lower in 12 months: 60% Source: BofA Fund Manager Survey Global fund managers’ biggest worry for most of the last year has been “inflation stays high,” but that is now changing. The biggest risk to the market — an often-watched gauge of investor concern — has now switched to a “systemic credit event.” What is the biggest risk to the market now? Systemic credit event: 31% Inflation stays high: 25% Central banks stay hawkish: 15% Source: BofA Fund Manager Survey Where would a “systemic credit event” come from? Investors can’t seem to agree. The majority think from the U.S. shadow banking system, but others cited corporate debt, real estate or even sovereign debt. This pessimism is consistent with other investor sentiment surveys. Optimism among retail traders has also been abysmal. The weekly AAII Investor Sentiment Survey, out last Thursday, was at a 6-month low for bullish sentiment and close to the levels of last September, which were near historic lows. Are you bullish or bearish in the next six months? Bullish 19.2% (average 37.5%) Bearish 48.4% (average 31.0%) Neutral 32.4% (average 31.5%) Source: AAII That’s the bad news. The good news is that these are sentiment indicators. Two rules about sentiment indicators: 1) they are contrarian indicators, and 2) they are most useful when the readings are at extremes (as they are now). What that means is that all the extreme sentiment has historically been associated with market bottoms. Even BofA’s survey writer acknowledged this: “Sentiment/positioning revealed in this month’s FMS is consistent with prior major market lows.” The firm also noted that other sentiment indicators (money flows, private clients’ asset allocation) are not yet in “capitulation” territory.
