(Link to the article with graphs, illustrations, and images on Placera.se)
The increasingly positive mood in the financial markets took a significant hit around the July/August transition, culminating in a 12% plunge on the Tokyo Stock Exchange last Monday, only to bounce back almost as much the next day.
The triggering factors behind the downturn were a weak U.S. employment figure and an unexpectedly large interest rate hike by the Bank of Japan. The latter set off significant global capital outflows as positions in stocks and bonds financed by loans in Japan were closed in a short period.
The latest major monthly fund manager survey by Bank of America was conducted from August 2-8, capturing much of the turbulent period in the markets. This is evident in the broad sentiment indicator (which sums up cash allocation, equity allocation, and growth expectations), which fell from 5 to 3.7 on a 10-point scale in August.
Regarding cash holdings, fund managers have kept them relatively low for several months in a positive light, but now they are slightly increasing, from 4.1% in July to 4.3% in August.
Still quite bullish given BofA’s rule that levels above 5% indicate excessive optimism and can be seen as a buy signal for stocks, while levels below 4% constitute a sell signal.
Another figure that has climbed in August is the risk of a U.S. recession. Earlier this summer, 15-20% of respondents identified this as the biggest “tail risk,” events that may not have a high probability but could cause significant damage if they occur.
In August, 39% see this as the biggest risk, surpassing “geopolitical conflicts” and “higher inflation” on the tail risk list.
The main scenario, however, is still that the global economy manages a soft landing in the coming year. 76% of respondents believe in this, with only 13% in the hard landing camp, a slight increase from 11% in July.
One reason almost everyone is counting on a soft landing is a greater confidence in interest rate cuts, especially in the U.S., this fall. About a third of managers foresee four cuts from the Fed this fall, with nearly as many expecting more than four cuts.
No one believes that the Fed will refrain from starting a rate-cutting cycle anymore.
An indication that managers have become more cautious is that they have significantly reduced their overweight position in stocks in their portfolios. The net overweight in stocks is now at 11% compared to 33% in July.
Analysis:
In summary, the recent market fluctuations and shifting investor sentiment reflect the ongoing global economic uncertainty. While the majority still expects a soft landing for the economy, concerns about a U.S. recession and geopolitical tensions are on the rise. The anticipated interest rate cuts by the Fed are seen as a mitigating factor, but caution is evident in fund managers’ reduced allocation to stocks. Investors should stay vigilant and consider diversification strategies to navigate the current market volatility.