Investor pessimism surged to the highest level in five months in April as turmoil within the banking system threatens to ignite a credit crunch for U.S. consumers and businesses, according to Bank of America's global fund manager survey.
Fund managers indicated that worries over tighter credit conditions had driven up bond allocation to a net 10% overweight, the highest since March 2009. In total, nearly two-thirds of investors expect a weaker economy in the next 12 months, the highest since December and reversing four months of improvement.
It marked the most bearish survey of the year.
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About 35% of participants in the survey identified the bank credit crunch and a global recession as the top risk to markets. That compares to about 34% who highlighted sticky inflation that keeps central banks on a hawkish trajectory as the biggest threat.
Another 16% see a systemic credit event as the biggest risk, while just 11% are worried about geopolitics – such as the war in Ukraine or tensions between China and Taiwan – worsening.
The poll of 286 fund managers was conducted between April 6 and April 13, in the aftermath of the stunning implosion of Silicon Valley Bank and Signature Bank.
An overwhelming number of investors see a "stagflation" scenario – in which economic growth peters out, but inflation remains high – as very likely. Roughly 86% of investors anticipate that a stagflation backdrop will linger into the first quarter of 2024, up from 83% last month.
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"Stagflation has become the dominant theme, as [fund manager] expectations for above-trend inflation and below-trend growth have remained above 80% for 11 months in a row," the survey said.
The survey comes amid growing fears among economists that the U.S. is headed for – or already in – a recession after a wave of gloomy economic data pointed to a steady cooling in the labor market.
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Despite growing fears of an economic slowdown, the investors surveyed anticipate the Federal Reserve will approve a final, quarter-percentage-point interest rate hike during its meeting next month. Officials have already approved nine straight rate hikes, the most rapid tightening cycle since the 1980s.
However, the fund managers expect central bank policymakers to begin an "easing cycle" in the first quarter of 2024, while 28% expect that to take place sometime in the final months of 2023.
