So far, the 2019 year has been exceptionally good to equities, as stocks have staged a significant comeback in the first six months of the year.
However, most financial experts now have become extremely worried over the future of the economy, expecting a downturn to be almost inevitable at this point as the U.S. enjoys one of the longest bull runs in its history.
According to a survey of global fund managers from the Bank of America Merrill Lynch, investors haven’t been this bearish since the 2008 financial collapse.
A survey of 179 global money managers overseeing almost $500 billion collectively in assets told the Bank of America that they have become extremely pessimistic for the country’s economic future.
Most of these fears have been driven by the U.S.-Chinese trade tensions, which when combined with weakening manufacturing data from China, could signal the start of a bear market.
“[Fund manager survey] investors have not been this bearish since the Global Financial Crisis, with pessimism driven by trade war and recession concerns” wrote Michael Hartnett, chief investment strategist. While fear in the markets has been high, Hartnett adds that the survey hitting these bearish levels could lead to something of a bullish contrarian pullback in the markets. Noting that markets have a tendency to climb higher when investors are worried, assuming there’s no major bearish development, Hartnett added that “The tactical ‘pain trade’ is higher yields and higher stocks, particularly if the Fed cuts rates on Wednesday.”
Specifically, the survey and additional research show that allocations to equities are at the lowest levels seen in history, while the month-over-month increase into cash and U.S. Treasuries were at their highest point since August 2011. The BAML Bull & Bear indicator also declined to 2.3 from 2.5, reflecting the growing pessimism in the markets.
The survey’s results were released as the markets anticipate the Federal Reserve’s two-day policy meeting that started on Tuesday. Investors are hoping that the central bank will cut interest rates in the face of ongoing trade tensions between the U.S. and China.
While worries in the markets haven’t been higher according to the survey, major indexes in the U.S. have been approaching record highs. The Dow Jones Industrial Average gained 1.35 percent on Tuesday, currently sitting at less than 2 percent from its all-time record high. The S&P 500 is just 0.6 percent from its closing record of late April, while the NASDAQ is just 2.1 percent short of it’s recent May record.
The first warning sign to send the financial press in a frenzy was when long-term and short-term yield curves inverted earlier this year. While many brushed off the event as a coincidental piece of data correlation, the inverted yield curves have successfully predicted every major recession in recent history.
Besides the trade tensions and weak manufacturing data already mentioned, a number of crucial industrial commodities which have acted as barometers for the health of the global economy have fallen in value significantly. Copper, in particular, has fallen significantly and reflects the weakening state of the Asian economies.
The general consensus among the financial community is that the U.S. will likely see a softer recession sometime late this year or in 2020. Considering how long the current bull run has lasted, a softer recession wouldn’t be that terrible.