Stagflation is now the consensus view on Wall Street for 2023 as investor sentiment remains historically bearish, Bank of America says
- The consensus view on Wall Street is that stagflation will plague the stock market in 2023, according to Bank of America.
- A survey from the bank found that 92% of fund managers expect a period of high inflation and low economic growth next year.
- The bearish outlook comes as cash levels sit near record highs, signaling the lingering bearish sentiment.
An overwhelming majority of Wall Street money managers thinks the stock market is set for a period of stagflation in 2023, similar to what was seen during the 1970s, according to Bank of America.
The bank found in its most recent survey of fund managers that 92% expect a period of high inflation and low economic growth in 2023, while 0% expect a bullish "goldilocks" scenario occurring, in which the economy avoids a recession and inflation falls.
That dynamic sets contrarian investors up for a solid trade, as investor sentiment remains historically bearish. The bank found that cash levels among fund managers are at 6.2%, which is "fodder for contrarian trading bulls," the bank said.
The long-term average cash level is 4.9%, and last month's reading of 6.3% was its highest since April 2001, when the dot-com bubble was bursting. Additionally, BofA highlighted that its Bull & Bear indicator is at 0%, illustrating that investors remain extremely bearish towards stocks.
"Net 77% say global recession, allocation to tech lowest since 2006, all mana from heaven for Q4 trading bulls," Bank of America's Michael Hartnett said.
Other sentiment indicators are also showing overwhelmingly bearish sentiment among investors, like the weekly AAII Investor Sentiment survey. The most recent data showed 40% of respondents are bearish towards stocks over the next six months, above the historical average of 31%.
And Hartnett, who has been consistently bearish towards stocks this year, said the market is buyable for short-term upside as long as traders can pivot and quickly sell once price targets are reached.
"If inflation rates tumble lower in coming months, bulls can wrestle back some control from the bears," he said. But he doesn't expect an upside move to last for long, and instead cautions investors to be ready to sell stocks if they're buying at current levels.
"We say 'rent the pivot', fade S&P 500 at 4,100," Hartnett said. The S&P 500 would have to jump 5% to reach 4,100, as it hovered around 3,920 on Thursday.
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