For the first time since February 2020, Covid-19 is no longer the number one fear among portfolio managers surveyed by Bank of America, the bank said on Tuesday.
The findings highlight how drastically the situation has changed over the past year. Confidence is growing due to the deployment of vaccines, which alleviates health security restrictions and unprecedented support from the federal government.
“Investor sentiment [is] without bullish ambiguities, ”Bank of America strategists wrote in Tuesday’s report.
US stocks quickly recovered from the pandemic. The Dow fell to 18,592 on March 23rd. The index has risen 77% since then. The Nasdaq has doubled during this period.
The hottest economy in decades
Economists are also very optimistic, especially because Uncle Sam is giving much more support to the economy than many thought was likely a few months ago. Last week, Congress approved President Joe Biden’s $ 1.9 trillion American bailout package.
Nearly half (48%) of fund managers surveyed by Bank of America now expect a V-shaped recovery, above the 10% predicted in May 2020.
A record 91% of sophisticated investors expect a stronger economy, surpassing the confidence noted after approving Trump’s tax cuts in late 2017 and during the early stages of the Great Recession recovery.
Fears of inflation are rising. But are they exaggerated?
But all this optimism, in addition to an unprecedented stimulus from Congress and the Fed, is worrying Wall Street that the economy may overheat.
The big fear is that resurgent inflation will cause the Federal Reserve to raise interest rates quickly, short-circuiting the economic recovery and the market boom. This happened in the 1970s and early 1980s when the central bank led by Paul Volcker domesticated inflation with aggressive interest rate hikes.
A record 93% of fund managers expect higher world inflation over the next twelve months, according to Bank of America. That exceeds the 85% who said this in February.
However, US officials have dismissed fears of inflation. Over the weekend, Treasury Secretary Janet Yellen said inflation could rise, but only temporarily.
Ed Yardeni, president of investment advice at Yardeni Research, is not too concerned about runaway inflation, as nearly 10 million American workers remain unemployed due to the pandemic.
“In our view, a wage price spiral in the 1970s is unlikely, despite our government’s fiscal and monetary excesses,” Yardeni wrote in a note to clients on Tuesday.
The turning point in bond yields
A related risk is the recurrence of the reduced rage of 2013, when Treasury yields rose after the Fed indicated it would gradually slow bond purchases as the economy recovered. Higher Treasury rates may make stocks seem less attractive compared.
After falling to 0.3% last spring, the ten-year Treasury rate recently rose to 1.6%. The rebound in yields from restless investors caused U.S. equities to fall sharply before recovering.
How high should yields rise to derail the bullish market?
Bank of America said 2% on the 10-year Treasury “could be the level of stock calculation.” Nearly half of the fund managers surveyed said 2% returns would lead to a 10% correction in stocks. Similarly, about half of investors indicated that a 10-year or 2.5% 10-year cash rate would make bonds attractive in relation to equities.
Still, professional investors don’t see any bubbles, at least not yet. According to the Bank of America survey, only 15% of investors believe the US stock market is in the bubble. A quarter say the stock market is in an initial bullish market, while 55% say it is in a final bullish market.