Friday, September 21, 2018

Fund Managers' Current Asset Allocation - September

Summary: Fund managers came into 2018 very bullish, with cash levels at 4-year lows and allocations to global equities at 3-year highs.

9 months later, global equity allocations are nearly the lowest since November 2016. Moreover, cash balances are high. Globally, investors are relatively bearish. How can this be?

The reason is mostly outside of the US. While US equities are at all-time highs, both European and emerging markets are down in 2018. That has impacted investors' regional allocations in an important way.

After being out of favor for 17 months, fund managers are now overweight US equities by the most since January 2015. It's at an extreme, and the US should underperform.

Fund managers are now underweight emerging market equities by the most in 2-1/2 years; the region is now a contrarian long.  Europe is neutral, as are global bonds.

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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 US is overweight while emerging markets in particular are underweight. This is a significant change from the past year.
A pure contrarian would overweight emerging markets equities relative to the US and underweight cash. 

Monday, September 17, 2018

Weekly Market Summary

Summary:  Mid-way through September, US equities are flat to lower for the month. The longer term trend is positive but the near-term outlook is unfavorable. It seems unlikely that any equity weakness will be substantial or long lived, but investors should remain on alert to heightened risk over the next several weeks. We believe that will be a good set up for gains into year end.

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Mid-way through September, US equities are flat to lower for the month (table from  Enlarge any chart by clicking on it.

Friday, September 7, 2018

September Macro Update: A New 49 Year Low in Unemployment Claims

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. The largest risk to the economy is the escalation in trade war rhetoric.

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

Tuesday, September 4, 2018

Weekly Market Summary

Summary:  SPX, NDX, small caps as well as broad measures like the Russell 3000 - which equals 98% of total US market capitalization - made new all-time highs (ATHs) last week. Even when indices are adjusted for the dominant FAAMNG companies, the remaining 99% of stocks also at new ATHs. The trend is clearly higher, and several new momentum studies suggest that equities are likely to gain more before year-end.

If there is a reason for caution, the risk is mostly short-term (within the next month) and probably not very significant, as explained in this post.

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US equities rose for a 5th month in a row in August, gaining 4-6%. Through the first 8 months of the year, SPX is up 9% while the Nasdaq-100 is up 20% (table from  Enlarge any chart by clicking on it.