US Markets

Investors take biggest cash position in a decade despite market rally

Key Points
  • Professional investors took their highest cash positions in 10 years during January after the brutal fourth-quarter sell-off, according to the latest Bank of America Merrill Lynch Fund Mangers Survey.
  • The pessimism was reflected in a belief that the S&P 500 peaked last year at a level 8.2 percent higher than Monday's close.
  • Such plunges in sentiment are generally considered good buying opportunities.

The fourth-quarter stock market meltdown continued to reverberate with investors in January, with many fleeing to cash and dumping risk despite a sharp rebound during the month.

Bank of America Merrill Lynch's latest fund manager survey, which gauges where global pros are positioning, showed the biggest net overweight position in cash since January 2009, just two months before the market bottomed and set up the longest bull run in Wall Street history.

Pessimism ran so high during the month that 34 percent of the 173 respondents said they think the peaked in 2018 at 2,931, or 8.2 percent below Monday's close.

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Allocations to global equities fell 12 percentage points to a 6 percent overweight, or the level compared with what would be typical. That's the lowest since the market turbulence of September 2016.

In all, Bank of America's strategists see all the fear as adding up to opportunity.

"Despite the recent rally, investor sentiment remains bearish," Michael Hartnett, chief investment strategist at the firm, said in a note titled "My Big Fat Buyers' Strike." "Fund managers' positioning is still a Q1 positive for risk assets," he said.

Indeed, the U.S. market is in the midst of a strong run that has taken the S&P 500 up 8.1 percent year to date, while the MSCI World Index has risen more than 7 percent.

Sentiment moving to extremes has been a reliable contrarian indicator for the market historically. The January stock market rally coincided with a cash allocation of 4.8 percent, which is above the 4.5 percent threshold that Bank of America considers a bullish sign.

Along with their aversion to stocks, fund managers indicated worry about global growth, as 55 percent say they are pessimistic about the economy and inflation.

Stocks tanked in late 2018 amid worries that global growth was slowing and that the Federal Reserve was about to make a policy mistake by continuing to raise interest rates in the face of the weakness. Fed officials have since indicated they are pausing on more tightening and will be patient in the future regarding additional hikes.

Markets rallied amid the policy dovishness, though most economists still expect a growth slowdown this year.