Photo by Spencer Platt.
Bank of America's latest fund manager survey shows investors' fear of Fed rate hikes has increased.
A jump in cash raising by investors is a contrarian buy signal because of the fear of central banks.
Bank of America said that investors are cautious but few are bearish.
According to the latest survey by Bank of America, investors are worried about a potential policy shift by the Federal Reserve.
The Fed is expected to speed up the pace of its monthly bond purchase program when it wraps up its policy meeting on Wednesday, and it could also signal when it might finally begin to raise interest rates in 2022, to help tame inflation.
Some investors have been conditioned to expect easy monetary policies from the Fed since the start of the COVID-19 epidemic in March 2020. There is plenty of room for the Fed to raise interest rates now that the Fed funds rate is at zero to 0.25%.
According to BofA's survey, fund managers now see Fed tightening policies as the top tail risk. The stock market fell in December of last year because of fears that the Fed would tighten too much.
The stock market has a history of generating positive returns, and a recent surge in cash allocations among fund managers is a contrarian buy signal.
BofA said that "hawkish central banks spark surge in cash and more defensive asset allocation." In December, cash allocations jumped from 4.4% to 5.1%, triggering a buy signal that has historically generated six-month equity returns of 6.5% on average.
BofA expects a rally in unprofitable tech companies and banks if the Fed comes off as dovish during its meeting this week.
inflationary pressures and a potential resurgence in COVID-19 are some of the top tail risks noted by fund managers. According to the survey, the most crowded trades among fund managers are long US tech stocks, long ESG, and long bitcoin.
Bank of America.
Business Insider has an original article.
