Capitulation?

Capitulation? One of Warren Buffett's many famous maxims is that investors ought to be “fearful when others are greedy, and greedy when others are fearful." There has certainly been no shortage of fearful trading this year: the S&P 500 is in a bear market, bonds have had their worst six months in decades, and even 2022's biggest winners—commodities—have tumbled over the past month. In their latest monthly survey of almost 300 fund managers directing $800 billion in assets, BofA Securities strategists see signs of investors throwing in the towel. They see pessimism over growth and profits at all-time highs and equity allocations at their lowest since the Global Financial Crisis. History shows that kind of capitulation has been followed by rallies in the following weeks. Barron's Jacob Sonenshine explains: [Capitulation] refers to when investors and traders are so worried about future earnings and how slower economic growth will affect companies that they sell stock in droves, sending the market tumbling, rather than hanging on in hopes that a downturn will soon end. Such a slump, coming when there isn’t fresh bad news to send shares lower, can mean sentiment isn’t likely to get much worse, and that a market correction has ended, or is about to. The BofA survey shows equity fund managers' collective cash holdings reaching 6.1% of their portfolios—the highest level since October 2001, in the aftermath of 9/11. That's a symptom of all the selling this year. In fact, a net negative 40% of survey respondents said they are overweight equities, referring to the percentage of respondents who said they are overweight stocks minus the percentage that said they aren’t. When positioning reaches such extreme levels, it tends to have only one direction to go, the thinking goes. That's even if fundamentals continue to look shaky as investors are always looking ahead to the next thing. The biggest risks cited by survey respondents were inflation staying high, a global recession, and hawkish central banks. Cash is a popular overweight, while the defensive sectors consumer staples, utilities, and healthcare are the three most popular equity allocations. Commodities still have fans in the survey, while technology stocks, consumer discretionary stocks, and anything Eurozone equities is unpopular. The net percentage of fund managers expecting economic growth to improve was negative 79% in July, and the net percentage who expected profits to deteriorate was at an all-time high. In other words, investors are decidedly fearful. "None of this means it is a certainty that the market decline is over, but it does signal that the worst is most likely in the rearview mirror," Jacob wrote. Read the rest of his report here.