Record stock rally faces risks from civil unrest, tech bubble

The stock market is close to 'full bull': BofA

Big money managers are growing concerned that civil unrest could upend the stock market rally, but remain more worried about the impact of the COVID-19 pandemic, according to a Bank of America survey conducted in November.

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A net 15% of respondents said civil unrest was the biggest “tail risk” to markets, trailing only COVID-19 (41%) and the tech bubble (19%). No respondents mentioned social upheaval as a concern in October’s survey.

The Charlotte-based lender surveyed 190 participants with $526 billion in assets under management between Nov. 6 and Nov. 12. The survey was conducted amid a resurgence in new COVID-19 cases and as the certification of the 2020 election hung in the balance following a flurry of lawsuits filed by the Trump campaign.

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“Reopening rotation can continue in Q4 but we say ‘sell the vaccine’ in coming weeks/months as we think we’re close to ‘full bull,’” wrote Michael Hartnett, chief investment strategist at Bank of America.

The benchmark S&P 500 has rallied 62% from March 23 through Monday’s record high with global growth and profit optimism at a 20-year high. A majority 66% of those surveyed believe the global economy is in an early-cycle phase as opposed to recession.

As money managers continue to pull forward their timing for a “credible vaccine” up to January from February, their cash balances have fallen to 4.1%, the lowest since before the COVID-19 pandemic. A reading below 4% would trigger the bank’s “sell signal.”

Investors have used their cash to rotate into emerging markets, small caps, value and banks. Favorite trades for 2021 include emerging markets, the S&P 500 and oil. A net 65% said long technology stocks remain by far the “most crowded” trade.

Risks to the bull market include a record-high percentage of investors expecting the yield curve to steepen (73%), the highest allocation to equities (net overweight 46%) since January 2018 and lowest allocation to cash (net 7%) since April 2015.

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“Contrarian bulls would position for completion of ‘full bull’ reopening rotation via longs in Japan, Eurozone, UK, and energy stocks,” wrote Hartnett. “Contrarian bears would positon for flatter yield curve trades e.g. long staples heading into late-20/early-21 ‘top.’”