Investor sentiment is ‘super bullish’ but does that really matter

Markets are upbeat, driven by optimism about the US economy, the re-election of Donald Trump, as well as expectations of further interest rate cuts.

Traders work in front of a chart displaying Germany's share index DAX at the stock exchange in Frankfurt. Picture: Daniel Roland/AFP

Global fund managers recently became “super bullish” about December, according to Bank of America’s latest survey.

Cash allocations hit a record-low, allocations to US stocks and the financial sector hit record highs, and interest in global risks assets hit a record high amid optimism about the US economy and the re-election of Donald Trump as well as expectations of further interest rate cuts.

BofA’s December survey of 204 global fund managers with$US518bn (822bn) of assets under management suggests positioning is too bullish and stocks may underperform.

The average cash allocation in BofA’s survey fell to 3.9 per cent, causing the second contrarian “sell signal” in the past three months, according to BofA’s chief investment strategist, Michael Hartnett.

Traders work on the floor of the New York Stock Exchange. Picture: Michael M. Santiago/AFP

Since 2011, there have been 12 of these contrarian sell signals based on cash levels, after which global stocks returned an average of minus 2.4 per cent in the next month and minus 0.7 per cent over the next three months. In a similar way, the average cash allocation of respondents fell to a net 14 per cent underweight from a net 4 per cent in November.

It was the lowest level in BofA’s records going back to April 2001.

The 18 percentage point drop in December was the biggest fall in cash allocation in five years.

Mr Hartnett said comparable lows in the survey’s measure of cash allocation – in January-March 2002 and February 2011 – coincided with “big tops in risk assets.”

But surely some of this bullishness is warranted?

Despite the fastest interest rate increases in decades, most central banks are now cutting rates.

The US Federal Reserve in particular looks to have pulled off a miraculous “soft” economic landing.

At the same time the AI boom is accelerating with heavyweight chipmakers like Nvidia reportedly still struggling to keep up with the demand from the so-called “hyperscalers” – the large cloud computing service providers like Microsoft, Alphabet, Meta, Apple, IBM and Oracle.

Notwithstanding risks from Donald Trump’s immigration and international trade plans, his re-election should also see sustained fiscal stimulus, financial and energy sector deregulation and possibly a significant cut in wasteful government spending.

President-elect Donald Trump, with NYSE president Lynn Martin, Melania Trump and trader Peter Giacchi on the floor of the New York Stock Exchange. Picture: Alex Brandon/AP Photo

As of Tuesday, the Dow Jones Industrial Average was fallen nine-days in a row – its longest losing streak since 1978. The S&P 500 has gone sideways this month, but market breadth – the number of stocks in the index that rise minus those that fall – fell 11 days running – the longest losing streak since at least 2001. That loss of momentum warns of at least a short-term pullback.

AI-market darling Nvidia entered “correction” territory after falling 12 per cent from a record high.

Nvidia formed a bearish “Head & Shoulders Top” pattern with a “target” of $US110.60 while $131.75 caps. Of course, these patterns rarely hit their targets but can spark selling at times.

The Federal Reserve Open Market Committee is expected to “give with one hand and take with the other” – cutting rates while dialling back the amount of cuts forecast – but mainly because economic growth is holding up better than expected, which is good for stocks.

On a seasonal basis, the US share market is likely to start its traditional Santa Claus rally.

With the S&P 500 up 27 per cent this year, most active fund managers will have underperformed their benchmarks and need to “chase” performance by buying stocks before year-end.

“We have now entered the ‘sweet spot’ for US stocks,” said IG market analyst Tony Sycamore.

The last two weeks of December and the first two weeks of January are historically the strongest four-week stretch for the S&P 500, with an average return of 2.6 per cent.

Moreover, BofA’s Bull & Bear indicator – its broadest measure of sentiment, remained “neutral” and still some way from “dangerously exuberant”, according to Mr Harnett.

His back-testing shows that such contrarian buy signals are “often stronger than sell signals as fear is easier to conquer than greed” whereas “lows are a moment” and “tops are a process”.

In December, global growth expectations improved to show a net 7 per cent of respondents expected a stronger economy, up from a net 4 per cent expecting a weaker economy in November.

Global growth expectations turned positive for the first time since April.

The December jump in global macro sentiment was led by greater optimism on US growth, with the highest percentage of respondents expecting a stronger US economy since at least November 2021.

Mr Hartnett said that Donald Trump’s policy agenda – tax cuts and deregulation in particular – boosted profit expectations, with a three-year high of 49 per cent of respondents expecting global profits to improve, up 22 percentage points versus November.

Originally published as Investor sentiment is ‘super bullish’ but does that really matter