Stansberry Research

Fund Managers Lose Faith in U.S. Equities, Turn Elsewhere in January

Stansberry NewsWire

Investors ushered in the new year by pruning U.S. equities from their portfolios...

According to Bank of America's latest Global Fund Manager Survey – which includes 253 participating fund managers with $710 billion in assets under management – investors are now the most underweight in U.S. equities since 2005...

Participants were less bearish about global markets – especially on fears of a European recession – than the previous quarter. This led to a massive rotation back into emerging markets and European equities and record-high cash allocation levels... at the expense of U.S. equities.

Take a look at the move back into bullish territory for European equities...

However, cash levels and overall equity holdings are still historically underweight.

Data also showed that global growth optimism hit a one-year high, while inflation expectations peaked. Slowing inflation in the U.S. and Europe, combined with the abrupt reopening of Chinese markets and larger economy, have temporarily boosted investor morale.

In fact, investor optimism for China's growth outlook has surged to multiyear highs...

Stateside, investor optimism is improving slightly, but the likelihood of a recession this year is becoming entrenched in markets. We can see this in how confident investors are that the Federal Reserve is nearing peak interest rates.

For the first time since 2020, a majority of investors believe short-term rates will be lower in the next 12 months...

When more investors think that the Fed is nearing its peak for the current tightening period, the bond market starts to surge as fund managers try to lock in higher yields.

Take a look at this next chart that shows how historically high investors have been positioned in bonds...

Now, look at how all these factors have played out on a month-over-month basis...

The bottom line here is that the market landscape is going to look a lot different than it did last year.

2022 encountered surging energy prices, a cutthroat dollar that scoured major currencies, and a rising rate environment.

And 2023 is likely to see similar volatility – just, this time, it will be the other side of the coin. The dollar is weakening fast, bonds are making a comeback, and the world's largest economies are poised to prevent a global recession. This means investors and fund managers will be more likely to actively manage portfolios to achieve positive returns.

We're only one month into the year, and investors are already shedding the passive, cash-heavy approach seen in 2022. Sustained dollar weakness should allow S&P 500 Index member companies to capture further upside in the form of earnings and sales. A weaker dollar, combined with higher cash utilization rates, are the first steps toward jump-starting a sustained rally in U.S. equity markets.