The latest Fund Manager Survey from Bank of America shows a high level of optimism on Wall Street . The major bearish sentiment reversal indicates a major Dow Jones Industrial Average (DJIA) rally is forming.
The report described the significant decline of recession fears by 33% and the rapid increase of global growth to 66% as the main factors behind the switch of Wall Street’s sentiment.
Since December 3, within less than three weeks, the Dow Jones has surged from 27,502 to 28,267. The upsurge was mainly triggered by the U.S.-China trade deal and relaxation of financial conditions caused by the injection of liquidity by the Fed.
The Dow Jones rally throughout the past three weeks materialized without heavy involvement of fund managers and financial institutions. Most institutional investors have been hedging against the equity market through safe havens like bonds .
As the Bank of America sees “a dramatic turnaround from the Most Bearish FMS since the GFC in June 2019,” an increase in inflow of capital into the equities market is generally anticipated.
The previous Dow Jones rally has primarily been caused by retail investors as Fear of Missing Out (FOMO) drove the market. The next upside movement will be triggered by institutional investors that move out of safer hedge assets.
According to Alex Krüger, a global markets analyst, the data from the Bank of America report can be interpreted as fund managers being bullish for the first time in two years.
Another way to interpret that data: Fund managers only now turned optimistic, after being bearish for two years.
The complete reversal of the sentiment around the stock market and actual numbers of the Dow Jones suggest that it is not just one major factor in the phase one deal boosting the bull market.
Rather, it is the strong jobs market, high liquidity, trade progress, and low-interest rate all showing a synergy to strengthen market conditions .
As such, despite skepticism on the sustainability of the current trend of the Dow Jones, it has become evident that the rally has legs and it has strong fundamentals to back it up.
Based on the data from the BoA report, cash holding levels of investors declined to 4.2%, for the first time since March 2013.
An excerpt from the report read:
So as they take down cash levels, FMS investors bought equities, commodities, RoW equities, banks & energy; sold bonds, real estate, US equities, utilities & staples.
In recent months, investors have growingly shifted from the housing market and bonds to enter the equities and the commodities market.
The Dow Jones is now in a prime position to extend its rally entering into 2020 to carry over a positive sentiment to the start of the year.