In global markets, all
signs of sentiment are pointing up. And it’s that very
unbridled enthusiasm that could spell their downfall.
But before we get into the negative implications, let’s take
stock of everything that shows just how overtly bullish investors
are feeling right now.
First, private client cash levels have dropped to a record low as
a percentage of total assets, according to data compiled by Bank
of America Merrill Lynch. That means investors are feeling more
emboldened than ever to put that money to work in the market.
They’re choosing that over holding money on the sidelines — a
risk-averse move typically associated with uncertainty.
Institutional investors are also holding the
lowest levels of cash since the start of the eight-year bull
market, survey data compiled by Citigroup show. The measure
now sits at less than one-third of a multi-year high reached in
Second, active equity funds just absorbed their biggest inflows
in 2 1/2 years, according to BAML. This is a sign of confidence
not just for the market, but for fund managers that make their
living picking stocks. It’s a rare bright spot for active
management, which has struggled alongside the rise of the
red-hot ETF industry.
Third and lastly, in perhaps the most direct reflection of
swelling confidence, global markets are hitting records. The
500 and its more tech-heavy counterpart, the Nasdaq
100, hit all-time highs this past week. The gauges are up
265% and 466%, respectively, over the course of the bull market.
Meanwhile, credit indexes have done the same amid 30 straight
weeks of investment-grade bond inflows, BAML data show.
What’s resulted is the so-called “Icarus
trade,” which has been characterized by the “melt up” seen in
risk assets since the start of 2016.
But there’s a downside to flying too close to the proverbial sun
— sooner or later, your wings will melt. BAML sees that happening
in the second half of the year as the bullish conditions outlined
above overheat further.
A “big fall in markets” will be an “autumn, not summer event,”
strategists at Bank of America Merrill Lynch wrote in a client
note. “Icarus won’t soar forever.”
The comments echo ones made by BAML the week before last, when
central bank tightening as a threat to the gradual trek
higher in risk assets.
So where do we stand right now? Despite the gloomy late-2017
forecast from BAML, it’s actually a great time to be an
equity investor. Company
stock prices are moving more than ever on the earnings
reports that are trickling out, representing a big potential
windfall in the short-term for traders willing to do their