Sentiment is a useful thing for investors to keep an eye on. The logic behind this is that markets are driven by expectations. As a result, if sentiment is at an extreme – either bullish or bearish – then there’s a good chance that markets are at a turning point. Why? Because if everyone is a bull, there’s no one left to buy. And if everyone is bearish, well, things can only get better.
With this in mind, the latest monthly survey of global fund managers from Bank of America (BoA) is quite the eye-catcher. It reveals that global fund managers are pessimistic to an extent only seen at periods of extreme investor stress, such as the Lehman Brothers collapse of late 2008 and the peak of coronavirus chaos in spring 2020.
In particular, the proportion of fund managers who think a recession is likely is now at a level only previously seen in April 2020 and March 2009 – both of which were significant turning points for markets. While there are reasons to be fearful today, most people would surely agree that things aren’t as bad as they were during the financial crisis, or at the outbreak of the pandemic. Does this level of misery mean that it’s time to buy?
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There’s one big difference
Saying “it’s different this time” in the investment world is just asking for trouble. But as readers may well remember, there is quite an obvious difference between today and those two occasions. In both March 2009 and April 2020, central banks were stepping in with what can only be described as “shock and awe” levels of quantitative easing (QE) to underpin investment markets. On this occasion, it’s central banks who are causing much of the angst with their (by recent standards) aggressive action against inflation.
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So the odds of seeing a major bottom until there is some sign of central banks at least relenting seem low. Could that point come soon? A look at other indicators in the BoA survey shows that the amount of cash being held (more cash is more bearish) and desire to take risk, are also near record lows. However, previous lows in these two indicators have come not right at turning points, but several months beforehand (eg, risk aversion last reached this level in October 2008, directly after the Lehman Brothers collapse). In other words, if the (fairly short) history of this survey is anything to go by, there are signs a decent buying opportunity could come within the next six months.
Of course, timing the market is not a sensible strategy. The key for long-term investors is to focus on buying what is undervalued today, not what might go up tomorrow. But if you have been hanging on to more cash than usual, now might be a good time to start putting some of it to work.
