The strong stock market performance to start 2019 has yet to lure most investors back in from the sideline, implying that more gains could be ahead, according to a closely followed survey of professional investors.
Even with the Dow Jones Industrial Average up more than 11 percent year to date, the allocation to global stocks among respondents to the March Bank of America Merrill Lynch Global Fund Manager Survey fell to its lowest since October 2016 at just 3 percent overweight.
Hedge fund managers in particular are at their lowest net allocation to equities since December 2016, with the trend among all investors toward more defensive positions.
"The pain trade for stocks is still up," Michael Hartnett, chief investment strategist at BofAML Data Analytics, said in a statement. "Despite rising profit expectations, lower rate expectations and falling cash levels, stock allocations continue to drop. There is simply no greed to sell in equities."
A "pain trade" is one that generally catches a lot of investors off guard. Sentiment surveys can be reliable contrarian guides when too much of the market gets caught on one side.
Most of the signs in March pointed toward caution, though cash allocations did fall two-tenths of a percentage point to 4.6 percent equating to a net 40 percent overweight, down from a decade high recorded in February.
Professional investors now worry most about a slowdown in China, cited by 30 percent of respondents. The second-biggest concern is the U.S.-China trade war, which had topped the worry list for nine straight months.
Though Hartnett said the defensive posture in the market points to upside, BofAML's bull-bear indicator, which measures allocations, is in "neutral" territory. Survey respondents consider the U.S. dollar at its most overvalued since June 2002 but said the most crowded trade is a bet against European stocks.
Economic growth expectations improved as did those for inflation, with a net 34 percent of investors expecting a higher consumer price index over the next year.
When it comes to interest rates, 55 percent of respondents said they think the Federal Reserve will continue to raise rates, against 38 percent who expect the tightening cycle to be finished. The central bank's policymaking committee begins its two-day meeting Tuesday, with the market expecting no rate hike.