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Professional fund managers have been ditching cash and diving into US stocks at record speed, hitting levels that Bank of America calls a warning signal for global markets.
What does this mean?
Bank of America's latest fund manager survey paints a very gung-ho picture: cash holdings are at an important low - just 3.9%. US stock allocations, meanwhile, are at a record-high 36% overweight, and optimism is soaring. Just 6% of respondents are worried about a global recession and 80% expect more interest rate cuts within a year. Citi's "panic/euphoria" indicator echoes the party-like-it's-1999 vibe, with euphoria levels seen only once since the dot-com bubble. Sure, this is just one view of the market, but the message here is clear: it's a bull market party, and the bears aren't welcome.
When optimism runs this hot, stocks tend to take a tumble. Since 2011, every time fund managers have been this "underweight" on cash, it's coincided with a major peak, and subsequent fall, in share prices. And when cash holdings have dipped below the 4% level - a Bank of America "sell" signal - global stocks have suffered an average loss of 2.4% in the following month.
The bigger picture: Too much swagger, too little caution.
Even if you agree with Goldman Sachs that US stocks will rally some more, it's hard not to worry a little about longer-term returns. And that's not merely because of the sky-high valuations in US shares. Right now, nearly 51% of the fund managers' assets are parked in stocks - and that's close to an all-time record. History shows that this particular measure of investor positioning is one of the best gauges (if not the best gauge) of ten-year returns. And right now, it's sending a message: don't underestimate the potential for a lost decade for US stocks.