By: Jack Pitcher, Originally published in The Wall Street Journal

Fund managers have lowest exposure to stocks relative to bonds since 2009.

Investors have a sour outlook on U.S. stocks. Contrarians say that is good news for the market. 

Turmoil in the banking sector has dragged fund managers’ enthusiasm for stocks to a 2023 ebb, according to Bank of America’s most recent monthly survey. The stress adds to worries including lingering inflation, higher interest rates and a slowing economy that have driven them to cut their stockholdings to their lowest levels relative to bonds since 2009. 

Institutions have pulled a net $333.9 billion from stocks over the past 12 months, according to S&P Global Market Intelligence data, while individual investors have yanked another $28 billion. Billions have flowed into cash equivalents, driving total assets in money markets to a record $5.3 trillion as of May 10, according to the Investment Company Institute. 

To some, all that doom and gloom looks like a sign of hope. Many on Wall Street view extremes in sentiment one way or the other as the time to do the opposite. Warren Buffett famously advised investors to “be greedy when others are fearful.

The S&P 500 slipped 0.3% this past week and has made little progress since the end of March, stalling after a strong start to the year for highflying tech companies that has left the index up 7.4% for the year. This week, investors will get a fresh look at the health of the economy with the release of April retail-sales data and earnings reports from retailers Walmart, Home Depot and Target.

The technicals and the sentiment side of the equation to us are just way offsides,” said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers, a $1.2 trillion asset manager. “Not only does that limit the downside, but if you get any more positive news, that could easily squeeze the market higher.” 

Cautious stock picking hasn’t offered much advantage in the market turmoil so far, and the longer that managers lag behind, the more pressure they will be under to add risk back into portfolios, Mr. Janasiewicz said. Active fund managers have largely underperformed the S&P 500 this year, with only one in three actively managed large-cap mutual funds beating their benchmarks in the first quarter. 

Individual investors share institutions’ bearish view, according to the long-running weekly survey from the American Association of Individual Investors. The survey showed 41% of individual investors expect stock prices will fall over the next six months, down from a recent high of 61% in September that preceded this year’s rebound but above the 31% historical average. The survey is commonly used as a contrarian tool, with investors expecting higher returns following extreme levels of bearishness and lower returns when sentiment is particularly upbeat.

Nancy Tengler, chief investment officer of Laffer Tengler Investments, said her firm has added more new equity positions than normal in recent weeks as indexes stalled and attitudes soured. After the firm trimmed winning trades earlier this year and ran its cash allocation to a mid-single-digit percentage—higher than normal—it has been looking for bouts of volatility to put money back into stocks. 

“You’ve got all this money on the sidelines,” said Ms. Tengler. “In our view, when bearishness is that universal, it’s historically always been a great time to look for opportunities.”

Analysts at UBS Global Wealth Management have for weeks warned that stock valuations look high and markets are betting on a too-rosy outcome for the economy. That very caution may help put a floor under any fresh market drop, said Mark Haefele, chief investment officer at the bank’s wealth-management arm.

One potential catalyst for a rebound: investors front-running the Federal Reserve. After announcing another quarter-point interest-rate increase at the Fed’s May policy meeting, Chair Jerome Powell signaled that the central bank may be done raising the policy rate for now. Traders in interest-rate futures are betting that the Fed will begin cutting rates as soon as this fall. 

That could prompt traders to pile in ahead of any potential rate cuts, he said. Rate cuts are typically viewed as a boost to stocks, which start to look comparatively more attractive than bonds. 

Positioning data suggests there’s a lot of money waiting to be put back into equities,” said Mr. Haefele. “That possibility could bias investors to be early rather than late in adding risk, with a decent pullback in equities viewed as a buying opportunity even before the first rate cut. Investors’ desire to be early on the Fed rate cuts may prevent equities from declining more than 10%.” 

The Fed has given no indication that it plans to cut, and if the central bank lowers rates soon, many believe it will be due to further turmoil with banks or a sudden recession—either of which could hurt stock prices.

And the last time fund managers were positioned as favorably toward bonds, in 2009, rates were near zero, so bonds paid little interest. The rally that followed gave birth to Wall Street sayings like “there is no alternative” to U.S. stocks. Today, high-yield savings accounts are paying 4%. 

One group that hasn’t stopped buying this year: hedge funds. They have increased their stock exposure by a net $30.8 billion since the start of the year, according to S&P.

Still, few in the market appear interested in adding risk right now, added Mr. Janasiewicz of Natixis.

“I’ve been out sharing my optimistic view in meetings with clients, and I’m taking a lot of flack for it,” he said. 

As published on


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