A recent survey by Bank of America (BofA) suggests that the stock market may be approaching a critical turning point. The bank’s December Global Fund Manager Survey (FMS) highlights a sharp drop in cash levels among investors, reaching a three-year low, alongside a surge in bullish sentiment. These factors together signal a possible “sell” moment for risk assets.
The survey revealed that average cash allocations among fund managers have decreased to just 3.9% of assets under management (AUM). This triggers BofA’s “FMS Cash Rule” indicator, which historically considers cash allocations at or below 4% as a warning sign for global equities. This is the second such instance in three months.
BofA strategists noted that similar low cash levels in the past, such as in early 2002 and February 2011, often coincided with major market peaks. “Since 2011, there have been 12 prior occurrences of this sell signal, with global equity returns averaging a 2.4% decline within a month and a 0.7% drop over three months after the signal was triggered,” said Michael Hartnett and his team in a note.
The report also points to a wave of “super-bullish sentiment” among fund managers. This optimism is largely fueled by expectations of robust U.S. growth under anticipated policy shifts and a Federal Reserve expected to lower interest rates. Equity allocations have now climbed to their highest levels since January 2022.
Investors appear to be embracing riskier assets in the short term, with increased investments in commodities, natural resources, and stocks from Europe and emerging markets. However, they are also hedging against potential downturns by holding more cash and bonds and reducing exposure to U.S. technology stocks, banks, and consumer staples.
Additionally, the survey indicates record-high allocations to U.S. equities and global banks. In contrast, European equities saw their steepest underweight positioning since October 2022, and commodity investments have fallen to their lowest level since mid-2017.
This combination of declining cash reserves, elevated equity exposure, and exuberant sentiment has prompted BofA to caution that the market could be nearing a critical point where risk assets face significant downside potential.
