April 18, 2023
Light equity positioning and elevated bearish sentiment have been major supports for equity markets in the recent past. This morning’s release of the April BofA Global Fund Manager Survey showed bearish sentiment at YTD highs and the highest allocation to bonds since March 2009. A crowded bearish outlook means the near-term pain trade is still skewed to the upside.
Economic justification for a bearish outlook isn’t hard to find. Forward-looking growth data like PMI and ISM reports are both in contraction with the most recent ISM manufacturing print very close to levels typically associated with recessions. March ISM manufacturing came in at 46.3. In the past, we’ve usually seen a recession once ISM manufacturing falls below 45. March ISM New Orders of 44.3 was also close to recession territory below 43.5. March ISM services remained in expansion territory at 51.2, taking the March composite number to 48.75. The five regional Fed surveys and composite ISM data have a strong positive correlation. Yesterday’s NY Fed’s Empire manufacturing survey is the first regional Fed survey for April. If the other four surveys were to match the large rebound seen in yesterday’s report, April composite ISM would likely reach expansion territory near 55. That outcome would quickly shift the economic narrative and shake the confidence of cautious fund managers in the aforementioned BofA survey.