Continued Rally in BofA-Hartnett Explained: Underlying Forces
The global stock market has seen a surge in recent times, with the MSCI All-Country World Index hitting new record highs. This renewed enthusiasm can be attributed to heightened expectations for economic growth, as referenced by respondents in the latest Bank of America (BofA) survey.
According to Michael Hartnett, the chief strategist at Bank of America, the reduced risk of a 'recessionary trade war' and the rising expectations for economic growth are key factors contributing to the sustained bullishness in global stock markets. Hartnett predicts that global stock markets will rise further due to these factors.
Interestingly, net 15% of investors are taking less risk than normal, an improvement from net 19% in August. This suggests a cautious optimism among investors, as equity exposure is not yet extremely high, according to Hartnett, which bodes well for the rally to continue.
The most popular trades are long positions in the 'Magnificent Seven,' which account for 42% of the trades. Long positions in cryptocurrencies are held by 9% of investors, while long positions in gold are favored by 25%.
The U.S. central bank (Federal Reserve) begins a two-day policy meeting today, with swap markets fully pricing in a 25 basis point cut. Almost half of BofA's survey respondents expect the Fed to make four or more rate cuts in the next 12 months.
The survey was conducted from September 5-11 and participated in by 165 investors with $426 billion in assets. The average cash balance remained at 3.9% for the third month in a row.
However, concerns about the Fed's independence have been raised by strategists at JPMorgan and Goldman Sachs. They have expressed concerns due to President Donald Trump's pressure on the central bank to cut rates and his unsuccessful attempt to remove Fed Governor Lisa Cook.
About 26% of participants cite a second wave of inflation as the biggest tail risk, while 24% cite a less independent Fed and dollar depreciation as concerns. On the other hand, only 27% want a focus on balance sheets, the lowest level since February 2022.
Moreover, the impact of comprehensive U.S. tariffs has been less severe than feared. About 39% want companies to increase their capital expenditure, the highest level since December.
No new information about AI's impact on productivity was provided in this paragraph. Michael Hartnett notes that only net 16% of investors now expect an economic slowdown.
In conclusion, the global stock market continues to rise, driven by heightened expectations for economic growth and a reduced risk of a 'recessionary trade war.' Despite some concerns about the Fed's independence and a second wave of inflation, investors remain bullish, with long positions in the 'Magnificent Seven' and gold being the most popular trades.
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