Investors have turned bearish again, with more market participants flocking to cash as a growing number believe that an economic “hard landing” is likely, according to the closely watched Bank of America (BofA) global fund manager survey.
BofA’s October survey of 225 fund managers with $664 billion under management, dated Oct. 17, shows that overall investor sentiment declined in October.
“Sentiment remains bearish,” the analysts wrote in the report, noting that BofA’s broadest measure of sentiment—based on cash positions, equity allocation, and economic growth expectations—fell to 1.7 in October from 2.2 in September.
Investors have increased their cash levels to 5.3 percent, the highest allocation to cash since July, from 4.9 percent.
Although a soft landing for the economy remains the base case, investor expectations for a hard landing rose 9 percentage points to 30 percent in October, from 21 percent in September.
Investors said the biggest “tail risk” is that high inflation will keep central banks hawkish (31 percent), followed by deterioration in the geopolitical situation (23 percent), and a recession/hard landing for the economy (21 percent).
‘Best Bullish Shout’: Recession Plus Rate Cuts
Earlier, BofA strategist Michael Hartnett said in a note cited by Bloomberg that the “best bullish shout” would be a recession and interest-rate cuts by the Federal Reserve, which would be a signal for investors to “sell cash” and “ignite new bulls,” driving a broader stock market rally.Meanwhile, retail sales rose by 0.7 percent month over month in September, roughly double the consensus estimates, according to advance data released on Oct. 17 by the Commerce Department.
“Good news is bad news, that’s the key,” Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, told Reuters. “The retail sales number was solid and could have the possible effect of keeping rates higher for longer.”
“That’s probably the biggest factor in the turnaround in today’s equities markets,” he added.
Retail sales, which are seasonally adjusted but not adjusted for inflation, rose by 0.7 percent in September, and August’s gains were revised upward to show 0.8 percent growth.
However, some experts have pointed out that, when adjusted for inflation, retail sales fell by 0.7 percent year over year in September, marking the 11th consecutive year-over-year drop.
“That’s the longest down streak since 2009,” market analyst Charlie Bilello said in a post on X, formerly known as Twitter.
Economist Peter Schiff said in a post on X that inflation, not stronger economic growth, was driving retail sales higher “as consumers paid more to buy less.”
“The gain also provides more evidence that the Fed has lost the inflation fight,” he wrote.
Although some saw the retail data as evidence that fears of waning consumer strength are exaggerated, recent data show that consumer confidence has fallen while record numbers of Americans are saying that high prices are eroding their living standards.
The latest University of Michigan’s consumer sentiment survey shows that overall consumer confidence plunged by 7 percent in October, after two months of relatively little change.
“Assessments of personal finances declined about 15 percent, primarily on a substantial increase in concerns over inflation, and one-year expected business conditions plunged about 19 percent,” Joanne Hsu, director of the University of Michigan Surveys of Consumers, said in a statement.
Future inflation expectations rose in October, the University of Michigan survey showed, and Bear Traps Report founder Larry McDonald warned of the economic fallout from the Israel–Hamas war.
Oil in Focus
Oil prices pushed higher on Oct. 17 ahead of a trip to the Middle East by President Joe Biden, which is likely to involve balancing support for Israel in its war against the Hamas terror group and trying to prevent a regional escalation.Brent and WTI crude futures rose on Oct. 17 by $0.74 and $0.69, respectively, to $90.39 (Brent) and $87.35 (WTI) a barrel.
Last week, oil prices soared as investors digested news of the Oct. 7 Hamas terror attacks on southern Israel that killed more than 1,400 people, mostly civilians.
Israeli forensic team members said that in some communities, some 80 percent of the victims—including children—bore signs of torture.
The Israeli military has been bombarding Hamas positions in Gaza in preparation for a ground offensive, with fears that the conflict could spread more broadly across the Middle East, a major oil-producing region, pushing up crude prices.
Last week, Brent saw its biggest weekly gain since February, ending the week up 7.5 percent.
OPEC+, which is made up of OPEC countries and allies including Russia, has reduced crude output since last year in what it says is preemptive action to maintain price stability in oil markets.
The Biden administration has been seeking ways to boost oil supply to markets in order to take some of the air out of high inflation, a big part of which consists of high energy prices. That’s included pleading with Saudi Arabia to pump more crude, an effort that has so far been unsuccessful.
However, with global oil consumption expected to climb to record levels by the end of this year, the CEO of Saudi Arabia’s Saudi Aramco said on Oct. 17 that the company could increase production if needed to stabilize markets.
