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The stock market rally is advancing strongly towards the end of 2024, that is evident… so far.
Investors have redoubled their confidence in US stocks as the market maintains an upward trend. In Bank of America’s (BofA) December Global Fund Manager Survey, 36% of respondents reported being overexposed to US stocks, marking the highest level in the history of this survey.
The sharp move into US stocks coincides with the lowest ever cash allocation and a rise in global risk appetite to a three-year high. This behavior aligns with recent Wall Street forecasts for US “exceptionality”, which could extend until 2025.
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Key factors driving optimism
Several elements are fueling this wave of optimism.
Michael Hartnett, investment strategist at BofA, noted that the possibility of a second term for Donald Trump, optimism about U.S. economic growth and expectations of interest rate cuts by the Federal Reserve are driving the “super sentiment.” bullish”.
This positive outlook is also supported by confidence that the global economy will avoid a recession in 2025.
Fear of “hard landing” fades
The possibility of a “hard landing” – where higher interest rates would cause an economic slowdown – seems increasingly distant. Only 6% of respondents expect the global economy to experience a hard landing in the next 12 months, the lowest figure in six months.
This trend reflects growing confidence in the stability of the global economy.
“Non-landing” and resilient growth
33% of investors now foresee a “no landing” scenario for the global economy. In this scenario, growth remains strong, but inflation is not reduced to the Federal Reserve’s 2% target. This forecast is based on the solidity of demand and inflation that, although persistent, does not seem to slow the pace of economic activity.
Daniel Morris, chief market strategist at BNP Paribas Asset Management, said markets are shifting from a “soft landing” to a “no landing” outlook. According to Morris, “inflation may not decline as the Fed projects, and along with this, a slowdown in economic growth will not be seen either.”
Hidden risks in cash reduction
Despite the optimism, not all signs are positive.
Investors’ cash allocation fell from 4.3% in November to 3.9% in December, the lowest level recorded in the BofA survey. This move may suggest that investors are betting too heavily on the stock market.
Historically, a cash position of less than 4% has been a short-term “sell signal,” according to Hartnett. Since 2011, when this signal is activated, the MSCI ACWI index has fallen on average 2.4% over the following month and 0.7% in the three months after that. This correlation suggests the possibility of a market correction in the short term.
We see how the iShares MSCI ACWI ETF (ACWI) has begun to correct at the beginning of this month of December, we will have to be vigilant. Source: Yahoo Finance.
The October precedent: false signal or warning?
Interestingly, this same “sell signal” was activated in BofA’s October survey. However, since then, the MSCI index, which BofA tracks through BlackRock’s iShares MSCI ETF (ACWI), has risen more than 1% through the start of trading on Tuesday. This calls into question the effectiveness of the sell signal in the current context of American “exceptionality.”
Outlook for 2025: caution in the face of euphoria
While optimism prevails, investors will need to carefully monitor cash movements and inflation expectations. History suggests that too low a cash allocation can precede market corrections. However, confidence in economic growth and the possibility of rate cuts by the Fed are driving the “super bullish sentiment” that could dominate 2025.
“Excess optimism” has led some analysts to warn that the market could be overvalued, especially if inflation persists and the Fed does not cut rates as expected. However, investors seem willing to take the risk, convinced of the “exceptionality” of the US economy in the coming year.
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