For a group notorious for its irrational exuberance at the very worst times, Wall Street strategists have taken a decidedly bearish tack as of late.
In fact, their current consensus allocation to stocks versus bonds and other asset classes makes the group the most bearish since 1997, according to data compiled by Bank of America Merrill Lynch.
This average equity allocation at 49.3 percent is “the first time below 50 in nearly 15 years, suggesting that sell side strategists are now more bearish on equities than they were at any point during the collapse of the tech bubble or the recent financial crisis,” wrote Savita Subramanian, chief U.S. equity and quant strategist for the firm, in a note entitled, “Wall Street Proclaims the Death of Equities.”
Many investors, including Subramanian, believe this is actually a great contrarian indicator, because if clients have heeded this bearish advice, all the sellers would be out of the market.
“Basically sentiment is negative enough that if a few good things happen, we could be sitting at S&P 500 1450 by year-end,” said Robert Sinn, trader and author of The Stock Sage blog. “If you tell me that the euro zone will pull things together, China won't land hard, and the U.S. will stave off the ‘fiscal cliff’ then equities are a huge buy here.”
Bank of America’s Subramanian actually has the data that backs up this contrarian view. According to her report, when the indicator has hit levels this low over the last 27 years, total returns for the market have been positive 100 percent of the time, with a median return of more than 30 percent.
To be sure, after 30 years of tailwinds such as falling interest rates and expanding demographics, some believe a return to a more normal allocation to stocks is proper.
In the 1980s and early 1990s, this average stock allocation often hovered between 48 percent and 58 percent.
“I think the allocations were ludicrously large for a long period of time,” said Peter Tchir of TF Market Advisors. “Fixed income, in particular, was under allocated. The problem was the allocation process got out of control and now is being normalized to a more reasonable long term norm.”
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