Bank of America stated this week that 'super bullish' investors have reduced their cash holdings to levels typically seen before stock market downturns.
The bank's latest fund manager survey found that cash allocation is at a record low due to a historic high in allocation to U.S. stocks. Optimism before Trump's second term and the Fed's ongoing rate cuts have driven up risk appetite, fueling this rotation.
Surveys show that the proportion of cash in total managed assets decreased from 4.3% to 3.9% this month, a level that constitutes a 'sell signal' and may prompt investors to reduce their equity exposure.
Bank of America analysts led by strategist Michael Hartnett stated that this signal has been triggered 12 times since 2011, leading to a 2.4% drop in the MSCI global index in the following month. The index typically declines 0.7% three months after a sell signal is issued.
Cash allocation in December dropped by 14%, marking the largest decline in five years. Bank of America noted that cash allocation has only fallen to such low levels twice on record, and each time coincided with significant peaks in risk assets.
Earlier this month, Hartnett predicted that the U.S. stock market will 'overshoot' in the first quarter of next year, as investors over-invest in assets benefiting from Trump's second term.
He further predicted that American exceptionalism in the market will peak in the second quarter of next year, which may mark the beginning of a significant adjustment in the U.S. stock market. Attracted by a substantial easing of financial conditions in Europe and Asia, asset management firms may reallocate to cheaper international stocks.
Many other forecasters on Wall Street still expect the S&P 500 index to rise further before 2025, although the pace of increase will slow. Analysts' average forecast is that the benchmark index will rise about 8% next year, despite high uncertainty surrounding some protectionist policies of Trump.
Article forwarded from: Jin Ten Data
