Peak Wall Street Optimism Is Now Behind Us: It’s All Downhill From Here
While we previously shared our thoughts on the noise value of the latest BofA Fund Manager Survey, which again “found” that being long bitcoin is the most crowded trade on Wall Street, when in reality it is anything but, it’s worth pointing out some of the signal in the survey conducted by BofA Chief Investment Strategist, Michael Hartnett, who writes that the May survey showed investor sentiment was “unambiguously bullish” with a whopping 69% expecting “above-trend” growth and inflation, a record high. Needless to say, inflation is now by and far the consensus trade…
… and while stagflation is a distant third at 8%, and double the odds of outright deflation, it is starting to creep higher…
… and as Hartnett warns, the creeping Main Street inflation has now triggered Wall Street deflation in the form of sliding China tech, US hyper-growth, XBT; and most notabtly, the 3rd lowest tech allocation since ‘06, which cements the flight from tech we have been discussing in recent weeks.
This is concerning because without tech (as a reminder just the 5 FAAMG stocks make up 25% of the S&P500), it is unlikely that the broader market can rise, and in a hyperfinancialized economy such as this one, without stocks the economy itself will be hobbled. That’s why, as Goldman first noted last week, BofA sees the first of signs “peak optimism” on growth, manifesting in a decline from 90% to 84% in May…
… shrinking profits margins (46% to 26%)…
… capex (54% to 51%)…
… and inflation (93% to 83%).
So if it’s all downhill from here then what happens next is a big drop in rates: according to BofA, since 1994 every time we hit the 5 peaks in “FMS optimism” has been followed by 75bps drop in 10Y Treasury yield next 2 quarters… although according to Hartnett it is less likely in ‘21 as Fed policy stance so uber-easy that FMS investors see inflation (35%) and taper tantrum (27%) as biggest 2 “tail risks”.
In light of the above it is probably not a surprise that investors are “positioned for inflation with a hint of defensives” resulting in the following asset allocation
commodities & cash up,
sector positions in “late-cycle” banks & resources now exceed 2006 highs,
tech OW at 3-year lows,
furious May short-covering in staples;
Euro-area #1 OW regionally,
investors long UK stocks for 1st time since Jul’12.
Hartnett’s reco for contrarian trades: stagflation bears (i.e. weaker growth) should short Europe, financials, materials, consumer cyclicals…
while inflation bulls (i.e. lower inflation) should go long Treasuries, tech stocks, EM, which is in line with BofA’s own second half cyclical value to defensive growth view.
Tue, 05/18/2021 – 16:20