More on how far equities can get

More today from the BofAML fundie survey:

1. The bulls are back…global recession concerns vanish and “Fear of Missing Out” prompts wave of optimism and jump in exposure to equities & cyclicals.

2. We say…easy part of rally over, tougher part of rally beginning…but rally it can as no “excess greed” (BofAML Bull & Bear Indicator @ 3.8), there is “excess liquidity” (and trade/fiscal easing), and corporate earnings set to accelerate.
3. FMS cash levels slashed from 5.0% to 4.2% (biggest monthly drop in cash since Nov’16 Trump election); cash levels now lowest since Jun’13.

4. FMS global growth optimism surges by most in 20 years to 18-month high…implies global PMI to 53-55, global EPS to 3-5%; 1st time in a year investors want more companies to increase capex than reduce debt/improve balance sheet.
5. FMS expectations for steeper yield curve highest since Nov’16, US$ outlook weakest since Sept’07; investors raised S&P500 “peak” target from 3166 to 3246, and bought value/banks/Eurozone, sold cash/bonds/utilities/staples (Chart 1).
6. The bull surprise: investors still say “trade war” #1 tail risk…“trade truce” can boost exposure to stocks/cyclicals further (play via contrarian FMS bull trade “long energy-short REITs”)The bull surprise: investors still say “trade war” #1 tail risk…“trade truce” can boost exposure to stocks/cyclicals further (via contrarian FMS bull trade “long energy-short REITs”).
7. The bear surprises: 84% say Fed won’t raise rates before 2020 US election so hawkish Fed could unwind stubborn long positions in US tech/growth & Treasuries; 52% say stocks best performing asset class in 2020 (21% say commodities)…other bear surprise is stocks, PMIs, EPS all top very early next year.

The bull case is further strengthened by the equity risk premium, via Daily Shot:

Value cheap!

Materials cheapest so long as you ignore China!

Value often mean banks:

Which aren’t that cheap!

Nothing much has really changed. If we get the trade deal and more positive rhetoric then we also get higher equities despite little improvement in earmings.

But if we don’t then we’ll see the opposite.  Because it’s basically a multiple expansion/contraction it is binary.

That’s why we retain a decent holding of bonds. Both risk and reward are currently elevated.

David Llewellyn-Smith
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