Fund Managers' Current Asset Allocation - May

Summary:  Although fund managers are less bearish than they were at the start of 2019, they are far from being bullish.  They are overweight cash. Their global equity allocations are almost a standard deviation below the mean. Their bond allocations are at a 7-year high. A slight majority expect profits to contract and economic growth to fall in the next year.

This is a far cry from 2018, when fund managers came into the year with cash levels at 4-year lows and allocations to global equities at 3-year highs. Global equities ended the year 15% lower.

US and European equity allocations remain low relative to levels seen at prior market peaks. Emerging markets are the consensus long. The US dollar is considered the most overvalued in 16 years, a possible tailwind for US multi-nationals and ex-US equities.

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Among the various ways of measuring investor sentiment, the Bank of America Merrill Lynch (BAML) survey of global fund managers is one of the best, as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.

Our sincere gratitude to BAML for the use of this data.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Overall: Relative to history, fund managers are overweight cash and underweight equities. Enlarge any image by clicking on it.

Within equities, the emerging markets are overweight while Europe, in particular, is underweight. The US is close to neutral.

A pure contrarian would overweight equities relative to cash and bonds, and European equities relative to emerging markets. 

Weekly Market Summary

Summary:  SPX, NDX and COMPQ are now all at new all-time highs (ATH). The Russell 3000 and Wilshire 5000, which represent essentially all of US equities, are also at their prior highs. The trend remains higher. Moreover, strong starts to the year and multi-month gains have a very high propensity to lead to further gains in the months ahead and by year end. There are precedents for the index to top now, but those are the exception.

Sentiment has become more bullish. This can certainly mark a top, but the historical record is inconsistent. It's a warning, not a red light.

In the most important respects, breadth is fine.

On balance, all of this leans bullish, but it would be a mistake to assume the indices will just sail higher in the remainder of the year. That can happen, but most often a drawdown much more than the barely 2% seen so far in 2019 will occur, even after a start like the current year.

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US equities continue to grind higher. SPX, NDX and COMPQ ended the week at new ATHs. They have risen in each of the first 4 months of the year. The leader is NDX, which has risen 18 of the last 19 weeks since Christmas Eve (table from alphatrends.net). Enlarge any chart by clicking on it.

April Macro Update: Employment and Housing Rebound

Summary: It's been a noisy few months for macro. The prolonged government shutdown in December significantly delayed many data reports. Into this mess, several reports were ugly:

Retail sales in December fell into yoy contraction for the first time since 2009. 

New employment in February fell to the lowest level since 2010. 

New home sales growth in November dropped 14% yoy, the lowest rate since 2011.

That weakness now looks anomalous: the data from the past month mostly point to positive growth. A recession starting in 2019 is unlikely.

The bond market sees continued growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (dots). The lag between inversion and the start of the next recession has been long: at least 7 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2019 at a minimum (from JPM). Enlarge any image by clicking on it.

Weekly Market Summary

Summary:  NDX is now at a new all-time high (ATH). Leadership by NDX is a positive for SPX: historically, the risk/reward over the coming weeks and months for SPX has been excellent.

On an equal-weigh basis, both SPX and NDX are also at new ATHs.  Any weakness in breadth is almost exclusively explained by the healthcare sector. The other sectors, aside from utilities, have all reached new YTD highs in the past week.

Volatility has been unusually low so far this year. By one measure, this is one of the least volatile starts to a year in the past 90 years. That's unlikely to last. The largest reaction so far this year has barely been more than 2%. Going back 40 years, no year has seen a lower drawdown and all but two (95%) have seen a drawdown of at least 5%. With SPX now within 1% of its prior ATH, a meatier reaction is odds on in the weeks and months ahead.

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US equities continues to grind higher. With about a week to go in April, SPX, NDX and DJIA are on pace to rise in each of the first 4 months of the year. The leader is NDX, which has risen 6 weeks in a row and 16 of the last 17 weeks since Christmas Eve (table from alphatrends.net). Enlarge any chart by clicking on it.

Advisors Perspectives: The Top 25 Venerated Voices for 1Q 2019

Many thanks to Advisor Perspectives for including the Fat Pitch in its list of the Top 25 Venerated Voices for 1Q 2019, placing ahead of much larger firms such as Invesco, Raymond James, BlackRock, Northern Trust, Pimco and AllianceBernstein. 

Advisor Perspectives’ website currently attracts over 150,000 unique visitors per month, virtually all of them financial advisors serving high- and ultra-high net worth individuals. The full list is here.