For the first time since February 2020, Covid-19 is no longer the fear no. 1 among portfolio managers surveyed by Bank of America, the bank said on Tuesday.
The findings highlight how drastically the situation has changed in the last year. Confidence is growing due to the launch of vaccines, reducing health safety restrictions and unprecedented support from the federal government.
“Investor sentiment [is] unambiguously make up, “Bank of America strategists wrote in Tuesday’s report.
US stocks recovered quickly after the pandemic. The Dow fell to 18,592 on March 23. The index has risen 77% since then. Nasdaq doubled during this period.
The hottest economy in decades
Economists are also very optimistic, especially since Uncle Sam offers much more support to the economy than many thought just a few months ago. Last week, Congress adopted President Joe Biden’s $ 1.9 trillion bailout.
Nearly half (48%) of fund managers surveyed by Bank of America now expect a V-shaped recovery, up from just 10% who predicted this in May 2020.
A record 91% of sophisticated investors expect a stronger economy, surpassing the confidence signaled after the Trump tax cut at the end of 2017 and in the early stages of the Great Recession recovery.
The fear of inflation is growing. But are they exaggerated?
But all this optimism – in addition to the unprecedented stimulus from Congress and the Fed – makes some on Wall Street worried that the economy could overheat.
The big fear is that invigorated inflation is causing the Federal Reserve to raise interest rates rapidly, short-circuiting the economic recovery and the market boom. This was the case in the 1970s and early 1980s, when the central bank led by Paul Volcker tamed inflation with aggressive interest rate hikes.
A record 93% of fund managers expect higher global inflation in the next 12 months, according to Bank of America. That rose from 85% who said that in February.
However, US officials pushed back against fears of inflation. Over the weekend, Treasury Secretary Janet Yellen said inflation could rise further, but only temporarily.
Ed Yardeni, chairman of investment advisory board Yardeni Research, is not too worried about runaway inflation, as about 10 million American workers are still unemployed due to the pandemic.
“Currently, a 1970s-style wage price spiral is unlikely, in our view, despite our government’s fiscal and monetary surpluses,” Yardeni wrote in a note to clients on Tuesday.
The tipping point for bond yields
An associated risk is the recurrence of the 2013 taper tantrum, when Treasury yields rose after the Fed signaled it would gradually slow bond purchases as the economy recovers. Higher Treasury rates may make stocks seem less attractive by comparison.
After collapsing to 0.3% last spring, the 10-year Treasury rate recently rose to 1.6%. Rising returns are generating unemployed investors, leading to a sharp decline in US stocks before they return.
So how high should yields rise to derail the bull market?
Bank of America said 2% of the 10-year Treasury “could be the level of stock calculation.” Almost half of the fund managers surveyed said that 2% returns would cause a 10% correction in stocks. Similarly, about half of investors indicated that a 10-year Treasury rate of 2% or 2.5% would make bonds attractive in relation to equities.
However, professional investors do not see a bubble, at least not yet. Only 15% of investors believe that the US stock market is in a bubble, according to the Bank of America survey. A quarter say the stock market is in an early stage, while 55% say it is in a late stock market.