How bad is the mood out there right now? Try max bearish.
So said Bank of America’s latest fund manager survey on Tuesday that showed expectations for profits and growth at recessionary levels. Some see this gloom as a contrarian buying signal.
After all, what if peak inflation and peak rate increases are just around the corner?
It isn’t unimaginable that investors are overwhelmed right now, as they try to gauge whether central banks will tip economies into recession in a battle to control inflation. That’s not to mention the potential spillover from an economic downturn into corporate earnings.
Our call of the day from Bernstein analysts Mark Diver and Sarah McCarthy says investors are facing a short-term-pain-for-long-term-gain moment for stocks.
“Our longer horizon equity market sentiment indicators are providing significant sentiment support and point to strong positive global equity market returns over the next 12 months. Conversely, our shorter term sentiment indicator which is effective over a four-week period is only at neutral levels,” said the pair.
The divergence between those two suggests strong returns are possible for investors from current levels over a period of a year or more, but further downside in the short term before a tactical capitulation level is reached, said Diver and McCarthy.
On that note, they are not in line with the thinking of the BofA survey that indicates more of investors just giving up.
Bernstein explained that their short-term sentiment indicator (4-week) remains neutral, with no signs yet of outflow capitulation from equity funds, except for Europe, where that has just begun. Their longer-term indicator, meanwhile, is showing extreme pessimistic levels, suggesting upside on the 12-months plus view.
“Our cross border equity flow indicator is signaling extreme pessimism, at levels only seen four times since 1987 and which were followed by strong returns over the following 12 months,” they said.
Those four moments in time were December 1987, with stocks returning 22.6% a year later, October 2008 and a 28.6% return, October 2011 and an +8.8% return, and March 2020, with a 55.2% return. The Bernstein analysts said they aren’t forecasting those types of returns, but that longer-term sentiment support should underpin positive returns over that 12-month time horizon.
Another positive for the long-term picture. Global net issuance, based on buybacks and equity issuance, is showing record net demand for stocks from corporates, something that should provide further support for stocks.
Buybacks began to recover in 2021 after a 2020 collapse and are now surging, driven by resilient earnings and free cash flow generation, the analysts said.
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