Big money investors have over the last six months poured cash into the markets at the fastest pace in 17 years as they fretted over COVID-19 and the upcoming presidential election, according to a new survey from Bank of America.

Cash holdings fell to 4.4% in October, down from 4.8% in September, and have now dropped 1.5 percentage points since April, the fastest decline since 2003. A reading below 4% is considered investor greed.

Respondents “said the recession is over, reduce cash, pause cyclical rotation, and price in contested election & February vaccine,” wrote Michael Hartnett, chief equity strategist at Bank of America. “We say sell SPX > 3600 and cyclical rotation via banks/energy to resume in Q4.”

Ticker Security Last Change Change %
SPX n.a. n.a. n.a. n.a.

TRUMP’S STOCK GAINS HIT REPUBLICAN RECORD

The Charlotte, N.C.-based lender surveyed 198 participants with $593 billion in assets under management between Oct. 1 and Oct. 8.

Thirty-four percent of respondents feared a second wave of COVID-19 was the biggest “tail risk” as expectations for the timing of a credible vaccine were pushed back from January 2021 to February 2021.

Absent the pandemic, investors were most worried about uncertainty caused by the upcoming presidential election, with 61% predicting the election will be contested.

Seventy-four percent of those surveyed said such an outcome was the one that would cause the most volatility. Another 14% forecast a Democratic sweep would shock markets while 8% feared a divided Congress and 4% were uneasy about a President Trump win.

On the economy, 60% of respondents said we are in an early-cycle phase as opposed to 26% who thought we were still in recession.

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Money managers at the virtual Milken 2020 Global Conference were largely bullish about stocks, but they outlined a litany of risks facing investors.

Uncertainty on multiple fronts is leaving investors trying to position for a range of outcomes—even the possibility of burgeoning debt loads leaves the U.S. facing a systemic financial crisis or a move toward socialism.

The annual conference, sponsored by former junk-bond investor Michael Milken’s Milken Institute think tank, brings together business leaders, policy makers, money managers, and Wall Street power brokers and is taking place online through Oct. 21.

Myriad uncertainties created by the variance in how countries were dealing with the pandemic, populism, geopolitical tensions, and broader divisiveness are forcing investors to grapple with an array of outcomes as varied as a multidecade growth slump or 1970s-style stagflation and requires “an enormous” amount of diversification, said Bridgewater Associates CEO David McCormick.


Carlyle Group

CEO Kewsong Lee called out the uneven nature of the recovery, even within asset classes and sectors. And while the 2008-09 financial crisis saw a lot of solvent companies become illiquid, the massive stimulus this year has left a lot of insolvent companies that are liquid—including many in industries with existential issues ahead, Lee said. That requires caution as investors look through battered industries.

A lot depends on the trajectory of the virus, but Agnès Belaisch, Barings Investment Institute’s chief European strategist, played down the magnitude of the risk posed by recent rise in Covid-19 cases in Europe. At the beginning of the crisis, about 40% of the population was furloughed, but that is now down to just 6%. “It’s a slow process, but a process back to normal,” Belaisch said. She argued that European policy makers’ ability to get monetary and fiscal policy through without talk of austerity and a focus on

OUTSIDE THE BOX



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A long-awaited stock-market rotation back to value stocks might benefit oil and gas companies in the short-term, but long-term there are concerns about the sustainability of the energy industry as it now exists. The sector’s woes are such that at the end of August 2020, energy stocks accounted for just 2.6% of the S&P 500 (SPX) , down from more than 16% in 2008. 

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The systemic risk surrounding energy companies due to climate change underscores the difference in approach between active managers and their index-fund counterparts and large retirement funds, as well as the tools active managers can use to make a persuasive case for meaningful change. While active fund managers increasingly are avoiding the energy sector and its risk of permanent capital impairment, many passive-fund investors recognize that as universal owners of the market and, by default, the economy, they have a stake in encouraging a successful energy-sector transition to renewables.

Eschewing the entire industry is short-sighted and misguided. While some investors have divested from fossil fuels, many continue to hold these investments in the hope of driving change through engagement. Active managers, drawn by seemingly low valuations, are engaging alongside them, with the combined weight of their collective voices leading to better reporting and some shift in strategy towards redirecting capital expenditure to renewables. The challenge will be if the change being supported by engagement will be enough to avoid fossil fuel stocks becoming “value traps.”

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Active managers have distinct advantages when it comes to proxy voting and engagement, the most obvious being that active managers have a far smaller number of securities to cover than a passive manager. Further, through their research processes, active managers can incorporate

(Bloomberg Opinion) — Now that the bear market is officially over, with the U.S. stock market having reclaimed its pre-coronavirus peak in August, it’s a good time to ask how well investors navigated the market’s breakneck plunge and recovery, the fastest round-trip on record. The answer may inform another question that is increasingly on the minds of individual investors: whether to hand their savings to a money manager or invest it themselves.

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Investors have never had more places to put their savings. Money management was once reserved for the well-heeled, but now everyone from Wall Street banks to discount brokers to fund companies to independent robo-advisers will happily look after anyone’s money, no matter how modest the sum. Alternatively, do-it-yourself-minded investors can purchase low-cost exchange-traded funds that track broad stock and bond markets on Robinhood and other free trading apps, which is cheaper than paying a money manager.

Or is it? Money managers like to say that investors are better off hiring a professional, even after accounting for fees, because the manager will stop them from making costly mistakes. Chief among them is investors’ reputation for ill-timed investment moves, loading up on stocks during booms and dumping them during busts.

But recent data suggest investors no longer deserve that reputation, at least when it comes to investing in U.S. stocks. Morningstar’s annual “Mind the Gap” report estimates the impact of investors’ behavior on their investments in U.S. mutual funds and ETFs. Specifically, it attempts to measure the so-called behavior gap, or the difference between the performance reported by funds and the returns investors in those funds manage to capture. According to the latest report, the gap for U.S. stock funds was a positive 0.29% a year during the 10-year period from 2010 to 2019, meaning that on average,

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