Record stock market rally faces risks of civil unrest and tech bubble

Major fund managers are increasingly concerned that civil unrest will disrupt the Stock market rally, but remain more concerned about the impact of the COVID-19[feminine] pandemic, according to a Bank of America survey conducted in November.

A clear 15% of respondents said civil unrest was the biggest “tail risk” to markets, behind only COVID-19 (41%) and the tech bubble (19%). No respondents mentioned social upheaval as a concern in the October survey.

The Charlotte-based lender surveyed 190 participants with $526 billion in assets under management between Nov. 6 and Nov. 12. The investigation was conducted amid a resurgence in new COVID-19 cases and with certification of the 2020 election hanging in the balance after a flurry of lawsuits from the Trump campaign.

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“The reopening rotation may continue into the fourth quarter, but we are saying ‘sell the vaccine’ in the coming weeks/months as we believe we are close to ‘full bull’,” wrote Michael Hartnett, chief strategist investments at Bank of America.

The benchmark S&P 500 index rebounded 62% from March 23 to Monday’s record, with global growth and earnings optimism at a 20-year high. A majority of 66% of respondents think the global economy is in an early cycle phase as opposed to recession.

As fund managers continue to advance their timeline for a ‘credible vaccine’ to January from February, their cash balances have fallen to 4.1%, the lowest since before the COVID-19 pandemic . A reading below 4% would trigger the bank’s ‘sell signal’.

Investors used their cash to look to emerging markets, small caps, value and banks. Preferred trades for 2021 include emerging markets, the S&P 500 and oil. A net 65% said long tech stocks remained by far the “most crowded” trade.

Risks to the bull market include a record percentage of investors expecting a steepening yield curve (73%), the largest allocation to equities (46% net overweight) since January 2018 and the lowest cash allocation (net of 7%) since April 2015.

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“Contrary bulls would position themselves for the completion of the ‘full bullish’ reopening rotation via long buying in Japan, Eurozone, UK and energy stocks,” Hartnett wrote. “Contrarian bears would position themselves for flatter yield curve trades, e.g. long commodities heading towards the late 20/early 21 ‘top’.”