Just over a year since Covid-19 turned the world upside down, investors are starting to get over it.
For the first time since the pandemic hit, respondents to the Bank of America Fund Manager Survey said the market has greater concerns.
Inflation has now become the greatest “tail risk” or outlier that could do the most damage, the widely used gauge of professional investors showed.
A total of 37% of respondents in the March survey said it was the biggest challenge, followed by 35% for “taper tantrums” – sharp bond market reactions in case the Federal Reserve unexpectedly pulled out of its monthly asset purchases.
A total of 220 investors with $ 630 billion in assets under management participated in the bank’s investigation, which was held March 5 through Thursday.
While the coronavirus – particularly issues with vaccine rollout – remains the third biggest threat, it was cited by less than 15% of respondents, about half the level in February.
March was the first time that Covid-related issues did not top the survey since February 2020.
Those three concerns easily outstrip a Wall Street bubble, higher taxes, or tougher regulations under the Biden administration.
The shift in priorities comes as the US vaccinates more than 2 million people a day. Hospital admissions and deaths nationally have fallen sharply, although the drop in the number of cases per day has declined. With most health professionals saying that by the summer and fall there is a return to a fairly normal life, investors are starting to shift priorities.
Inflation has come into view this year as government bond yields have risen to pre-pandemic levels. A market-based indicator, the break-even rate between the 5-year Treasury yield and inflation-indexed bonds has risen to its highest level in nearly 13 years.
Survey respondents said a shift to the 2% level in the 10-year Treasury could cause a correction in the stock market, or a decline of more than 10%. A jump to 2.5% would make bonds more attractive than stocks. The benchmark note traded around 1.6% on Tuesday morning.
While markets have been volatile during the rise in revenues, the main averages have scaled up to near record levels. The Dow Jones Industrial Average is up 7.7% so far amid gains from stocks such as Goldman Sachs, Boeing and Caterpillar benefiting from higher interest rates and a more aggressive economic recovery.
Broadly speaking, the research shows that “investor sentiment [is] unequivocally optimistic, ”said Michael Hartnett, Bank of America’s chief investment strategist.
However, investors adjust their portfolios.
Managers have reduced the allocation to technology stocks to their lowest overweight level since January 2009. The survey also revealed a marked shift in commodities to record highs. Managers have assigned their largest overweight position in banks since March 2018. Since November 2018 they have also made the biggest step towards energy.
Equity optimism stems from high hopes for a V-shaped recovery, with 48% pointing that path for the economy. A net 91% of managers expect stronger growth, the highest level in the history of the survey.