Early sell-off in 2022 was just an 'appetizer,' closely watched Bank of America survey indicates

Published Tue, Apr 12 20228:04 AM EDTUpdated Tue, Apr 12 202211:44 AM EDT

The stock market sell-off to start 2022 may have just been a warning shot if the latest Bank of America survey of highly nervous investors holds true. April's BofA Global Fund Manager Survey showed elevated concerns that high inflation will force the Federal Reserve into a policy mistake that then could trigger a global recession. Indeed, optimism for global growth hit a historic bottom of a net negative 71% of respondents, while fears that the Fed will raise rates too quickly hit an all-time high of 83%. Respondents think the central bank will raise short-term rates at least seven times this year as it looks to control inflation running at its fastest annual pace in more than 40 years. Taken together, the Bank of America survey "is bearish as fears of fast & furious Fed sends global growth optimism to all-time low, keeps Wall St stability risks high," wrote Michael Hartnett, the bank's chief investment strategist. Weighed by concerns over soaring prices to start the year, compounded later by the war in Ukraine, the S & P 500 tumbled about 8.5% in the first two months of 2022, briefly entering official correction territory. The broad-market index has stabilized some since then but is still off 7.4% for 2022. Over the past month, investors trimmed their cash positions from 5.9% of portfolios to 5.5%. Still, they remain troubled about the picture for stocks this year. That's why Hartnett warned of more danger to come. "Though not as bearish as war-shocked March [fund manager survey], sentiment is poor," he said. "We remain in 'sell-the-rally' camp as Profit-Policy set-up means Jan/Feb sell-off was appetizer not main course of '22." Investors worried about inflation have flocked to commodities, increasing positions to a net 38% overweight. They are still overweight stocks, but only by 6%, and have slashed bond allocations to 68% below normal weighting. In turn, that saw the long oil and commodities trade viewed as the most crowded one, according to respondents. Hartnett said it's strange seeing investors still willing to own stocks despite the fears over growth and the general downbeat view of the market and economic outlook. Investor expectations for a stagflation scenario of higher inflation and lower growth hit 66%, the highest level since August 2008, just before the worst of the financial crisis. "The disconnect between global growth and equity allocation remains staggering," he wrote. "Investors got slightly more bullish on equities. Though still at depressed levels, equities are nowhere near 'recessionary' close-your-eyes-and-buy levels." Respondents see market stability risks on a level with the initial Covid pandemic shock and the financial crisis. "The high perceived risk to financial market stability points to a further decline in equity prices," Hartnett said. The survey included responses from 329 panelists with $929 billion in assets under management and encompassed the period from April 1-7.

Patrick Knickerbocker | CNBC

The stock market sell-off to start 2022 may have just been a warning shot if the latest Bank of America survey of highly nervous investors holds true.