Morning Notes — Sentiment Warning

Sentiment: The November BofA Global Fund Manager Survey noted cash levels fell to 4.1% from 4.4% last month.  This level is now below pre-pandemic levels and dangerously close to 4%, which the survey providers consider as a ‘sell signal.’  The allocation to equities is now at its highest since January 2018, while measures of ‘growth’ and ‘profit optimism’ hit a 20-year high.  Last Thursday we issued a warning based AAII equity sentiment reaching bullish extremes at 55.84.  That level is the second highest on record behind 59.75 made on January 4, 2018.  On January 29, 2018, the S&P 500 began a two week correction of ~11.4%. We issued a similar warning on Friday based on weekly fund flow data.   

Intermediate term: After a brief period of consolidation, we expect ~3 quarters of relative value sector outperformance based on: 1) a very low starting point with value/growth ratio still ~30% below levels from January 2018; 2) gently higher bond yields as labor markets continue to improve and wage growth bottoms out and; 3) reduced trade uncertainty, normalized consumer activity and stronger PMI data.