Stocktake: Risk of market correction appears to be rising

Sentiment looks toppy right now and the Bank of America has issued a stark warning

The risk of a near-term market correction is rising, judging by Bank of America’s latest monthly fund manager survey.

Sentiment looks toppy right now. A record number of managers expect higher inflation in the next year, while a net 87 per cent expect global profits to improve – the best profit outlook in 19 years. Similarly, a record number expect a steeper yield curve – even more, notes BofA, than previous highs recorded during the 2008 Lehman bankruptcy, the 2013 Fed taper tantrum and the 2016 US election. Of course, fund managers are surely right to expect global growth to pick up; the worrisome part is they’re almost uniformly bullish on stocks despite a huge market rally and elevated valuations. A record number are taking more risk than normal. Cash allocations are at their lowest level in eight years, triggering BofA’s cash rule sell signal. Equity allocations are at their highest level since January 2018, when indices peaked and then plummeted following a furious market rally. Contrarians will be especially concerned by heady sentiment towards emerging markets – the most preferred region for 2021, fund managers are more overweight in emerging markets than at any time in history.

Excessively bullish sentiment can be a red flag, prompting BofA’s stark warning: “Risk correction imminent.”