The latest Merrill Lynch Fund Managers Survey showed the highest reading of bullishness ever. They report that fund managers have a net 67% overweight position in equities. This is the highest level they have ever recorded. Gary Baker of Merrill writes:
“The February FMS is one of the most bullish in years. Institutions have record equity and commodity overweights, very low cash levels and the strongest risk appetite since Jan‘06. Surging inflation expectations show we are no longer in a Goldilocks environment and a meaningful tactical correction in risk assets could be caused by a jump in interest rates or weaker US growth.”
“Global investors’ average cash balance fallen by 20bps to 3.5%. On our backtesting work a level of 3.5% or below has in the past signalled an equity market correction on a four-week horizon.”
“Investors have moved to all-in on equities, at +67% O/W. This is the highest level in survey history. This puts the asset class into potentially overowned territory(more than +1SD above average), and makes it vulnerable to any macro disappointment, but could also be part of a structural re-alignment. Commodities remain the second most popular asset class after equities, and have also reached a new to record allocation reading of net 28% O/W, upfrom a net 16% last month.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.