Investors sound upbeat about equities for the next year after the gloomy outlook earlier. A BofA (Bank of America) Global Research Fund Managers survey showed that the bullish sentiment is increasing on equities, according to a CNBC report on Tuesday. Fund managers are shifting their focus from bonds to equities—a notable sentiment change from investors compared to last month. The turnaround in the outlook is coming at a crucial time. Currently, equity indexes are trading at all-time highs.
BofA survey shows bulls are back
The BofA survey showed that the “bull and bear” reading reached the highest bullish levels in December since April 2018. Cash allocations fell to 4.2% of the portfolios—the lowest levels since March 2013. The sentiment changed on the recession front as well. A net 68% of respondents think that a recession isn’t likely next year. The global slowdown and a yield curve inversion in March intensified the recession fears.
Phase one of the trade deal likely had a drastic impact on the sentiment. An amicable solution to the 18-month US-China trade war could fuel growth next year. Trade conflicts between the two countries created anxiety in businesses this year, which ultimately dented corporate investment. However, favorable developments on the trade war front might reinstate capital expenditures.
Stock markets at all-time highs
Despite the clouding sentiment, broad market indexes have had a solid run this year. The Dow Jones (DIA) (DJIA) and the S&P 500 (SPY) indexes have risen almost 21% and 28%, respectively, YTD. However, defensive stocks also had an unusual run this year.
Defensive or safe-haven sectors like utilities (XLU) and consumer staples (VDC) have risen approximately 20% each this year. Investors usually switch to defensives amid broader market uncertainty due to their stable stock movements and relatively higher dividend yields.
Since the sentiment appears to be changing, according to the BofA survey, investors might turn to growth stocks from defensives. We’ll have to see where markets head when they’re already at all-time highs.
JPMorgan Chase is also bullish
JPMorgan Chase strategists also have similar views on equities for the next year, according to Bloomberg. The strategists think that stocks could continue to rise next year, while gold could fall. They think that the recession risk for the next year is low due to the record low unemployment rate in the US and the global PMIs bottoming out.
BofA survey shows sentiment is changing, challenges remain
However, the US-China trade war could still be a major hurdle for global economic growth. Recently, the trade war reached the first milestone with phase one of the deal. However, a long-term resolution isn’t in sight. The partial deal was reached after several rounds of negotiations that lasted for months. The interim trade deal seems to have restored the market sentiment. There are uncertainties about a concrete solution to the trade conflicts.
Falling interest rates also helped markets reach record highs this year. However, that component might be missing next year. The Fed has warned that it will keep the rate steady through 2021. To learn more, read Why Powell Didn’t Cut Interest Rates.
Market participants are also focusing on President Trump’s impeachment. Democrats voted for his impeachment on Wednesday night, according to a CNBC report. Stock market indexes have reached record highs under the Trump administration’s pro-business policies. Last month, President Trump tweeted that his impeachment would lead to the biggest stock market fall and a depression. However, the impeachment process still has to move to a trial in the Senate. Apart from trade war developments, Trump’s impeachment could also act as an important trigger for the markets going forward.