Just over a year since Covid-19 turned the world upside down, investors are starting to get over it.
For the first time since the pandemic, respondents to the Bank of America Fund Manager Survey said the market faces greater concerns.
Inflation has now become the biggest “tail risk”, or outlier event, that could cause the most damage, the indicator showed, largely followed by professional investors.
A total of 37% of respondents in the March survey cited this as the biggest challenge, followed by 35% for “tantrums” – sharp reactions in the bond market if the Federal Reserve unexpectedly retracted its monthly asset purchases.
A total of 220 investors with $ 630 billion in assets under management participated in the bank’s survey, which took place from March 5 to Thursday.
Although coronavirus – specifically problems with the vaccine’s launch – remains the third biggest threat, it was cited by less than 15% of respondents, about half the February level.
March marked the first time that Covid-related concerns have not spearheaded the survey since February 2020.
These three concerns easily overcame a bubble on Wall Street, higher taxes or stricter regulation under the Biden government.
The shift in priorities comes as the United States vaccinates more than 2 million people a day. Hospitalizations and deaths across the country have dropped, although the decline in daily cases has stabilized. With most health professionals indicating a somewhat normal return to life in the summer and fall, investors are beginning to shift priorities.
Inflation has surfaced this year as government bond yields have reached pre-pandemic levels. A market-based indicator, the “balance” rate between 5-year Treasury yields and inflation-linked bonds, has jumped to its highest level in almost 13 years.
Survey respondents said that a change to the 2% level in the 10-year Treasury note could cause a correction in the stock market, or a drop of more than 10%. A jump to 2.5% would make bonds more attractive than stocks. The benchmark was trading around 1.6% on Tuesday morning.
Although the markets were volatile during the rise in yields, the main averages reached almost record territory. The Dow Jones Industrial Average has risen 7.7% in the year to date amid a recovery in stocks like Goldman Sachs, Boeing and Caterpillar, which benefit from higher rates and a more aggressive economic recovery.
In general terms, the research shows that “investor sentiment [is] unequivocally optimistic, “said Michael Hartnett, chief investment strategist at Bank of America.
Investors, however, are making adjustments to their portfolios.
Managers have reduced their allocation to technology stocks to their lowest level of overweight since January 2009. The survey also found a sharp shift in commodities to a historic high. Managers have allocated to their largest overweight position in banks since March 2018. They have also made the biggest shift to the energy sector since November 2018.
Optimism about stocks comes with high hopes for a V-shaped recovery, with 48% indicating this path for the economy. 91% net of managers expect stronger growth, the highest level in the history of the survey.