What’s astonishing after the events of the past couple of months is not how fearful Wall Street is, but how complacent. Major institutional investors remain heavily overinvested in stocks — even at almost unprecedented valuations — and underinvested in safer bonds, according to the latest closely watched survey from BofA Securities. That bullish positioning leaves the market vulnerable to a much sharper pullback than we have seen so far, especially if any further bad news comes along to spark renewed fears.
A net 49% of fund managers are overinvested in the stock market, the survey shows. (A net 49% means the percentage who are overinvested exceeds the percentage who are underinvested by 49 percentage points.) This is down only slightly from last month’s level and is high by historic standards. Don’t Short Yourself offers weekly money tips to help you earn it, stack it and grow it. I would like to receive updates and special offers from Dow Jones and affiliates.
I can unsubscribe at any time. **Opinion:**This investment is safe from both Trump and the Democrats — and it pays 4.7% Meanwhile, the situation is almost exactly reversed regarding bonds, where a net 48% are underinvested. Fund managers also hold relatively low levels of cash and Treasury bills in their portfolios, although those levels have come off the lows seen a month ago. As cash is a superlow-risk asset in the very short term, the amounts that fund managers hold in their portfolios is often a good indicator of their optimism or pessimism.
Money managers are extremely worried about bonds, with some reason. Persistent inflation is bad for fixed-income investments. More ominously, thanks to the scale of U.S. budget deficits and the national debt, markets are starting to question the underlying solidity of Treasury bonds themselves. **Read:**Your Social Security COLA could go up another $71 per month in 2027.
That’s not necessarily good news. Yet any reasons to be worried about bonds are also reasons to be worried about stocks. If someone can think of a way that a U.S. debt or inflation crisis would somehow leave the stock market unaffected, it would be very interesting to hear it.
In the European sovereign-debt crises of 2011-12, the stock markets of the affected countries — Portugal, Ireland, Italy, Spain and Greece — fell by 50%. Stocks offer very little margin of safety for investors, if any. At current stock prices, the U.S. stock market is valued at about 230% of annual gross domestic product — a level far beyond those recorded in the past, even during acknowledged bubbles such as 1999-2000 and 2006-07.
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