US economic outlook vs the rest of the globe is brightest in 11 years

Key Points
  • A record 85 percent of respondents to the Bank of America Merrill Lynch Fund Manager Survey see global growth in the "late" stages.
  • The gap between expectations for the rest of the world and the U.S. is at its highest level since October 2007.
  • Professional investors most fear a trade war, though concerns over the Fed tightening policy too quickly are on the rise.
A man using an angle grinder on a steel piece at a metal fabrication company on August 7, 2018 in Orange County, New York.
Waring Abbott | Getty Images

The U.S. is putting more distance between itself and the rest of the world in terms of growth expectations from professional investors.

The news keeps getting worse for global economic prospects, with respondents to the Bank of America Merrill Lynch Fund Manager Survey for October now holding their dimmest view for the future since the financial crisis.

A record 85 percent of market pros say the world is in the "late cycle" period of growth. That's the highest reading since November 2008, just two months after Lehman Brothers collapsed and triggered the worst days of the Great Recession. That level is also a full 11 percentage points above its previous record in December 2007. A net 38 percent expect the global economy to decelerate over the next year.

However, the view on the U.S. is not as dour.

In fact, the gap between expectations for the U.S. economy vs. the world is at its widest since October 2007, right around the stock market highs before the crisis plunge.

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The results come just a year after global synchronized growth was one of the market's biggest stories. Economies were thriving together for the first time since the recession, sparking a rally in risk assets around the world.

Now, much of the global economy is sinking while the U.S. continues to rise.

The International Monetary Foundation recently cut its outlook for the world economy in 2018-19 by 0.2 percentage points to 3.7 percent. At the same time, U.S. GDP rose an average 3.2 percent in the first half of 2018, and the Atlanta Fed is projecting the third quarter to come in at 4 percent.

Investors are most worried about a global trade war as the Trump administration uses tariffs to try to close its trade deficit, particularly with China. However, fears about the conflict are declining as respondents turn to concerns that the Federal Reserve may make a policy mistake by tightening too quickly.

That jibes with indications company executives have been giving during earnings calls so far. Goldman Sachs found that during the nascent third-quarter reporting period, more officials are expressing concerns about rising currencies, particularly the U.S. dollar, than tariff issues.

The Fed has been raising rates in a gradual, steady manner, and Chairman Jerome Powell recently jolted markets when he said there is a good distance to go yet before rates stop increasing. In addition to hiking its benchmark funds rate, the Fed has been reducing the size of its balance sheet by allowing up to $50 billion a month in proceeds from bonds it holds to run off in a process nicknamed "quantitative tightening" or QT.

A slowdown in China ranks third among investor concerns.

Stocks have been volatile over the past two weeks, though the pessimism may not have reached a point yet to turn the latest market selling around.

"Investors are bearish on global growth, but not bearish enough to signal anything but a short-term bounce in risk assets," Michael Hartnett, BofAML chief investment strategist, said in a statement.

Fund managers have cut their exposure to global equities; current positions are at a net 22 percent overweight, just 3 percentage points higher than July's recent low of 19 percent. Allocations to U.S. stocks also tumbled to a net 4 percent overweight, a 17-point drop, as fund managers see domestic equities as "very overvalued."

Correction: This story was revised to correct that U.S. economic outlook vs the rest of the globe is brightest in 11 years. Earlier headlines had the wrong length of time.