(Bloomberg) -- FOMO is driving equity fund managers in a “super-frothy start” to the new year, says Bank of America Corp.
The rally in January implies an annualized return of 133 percent in the S&P 500 Index, and a fear of missing out has prompted investors to send a record amount of money to equity funds in the past four weeks, strategists at the lender’s Merrill Lynch unit wrote in a Jan. 18 note citing EPFR Global data. Equity markets around the world have been on fire in 2018, with U.S. benchmarks in particular hitting milestone after milestone in quick succession.
“Frothy price action likely continues in the short term,” strategists led by Michael Hartnett wrote, while warning that the bank’s bull-and-bear investor sentiment indicator was at 7.4, close to the sell-signal level of 8 or higher.
The question plaguing most institutions, say the strategists, is “what level of bond yields will cause an equity correction.” Yields on U.S. debt have been rising on bets of more Federal Reserve rate hikes and increased government debt issuance to finance America’s budget deficit, and that of the benchmark Treasury on Friday climbed above 2.64 percent to its highest level in more than three years.
U.S. equity funds attracted $6.4 billion in the week through Wednesday, the most among global markets, with European ones drawing $2.2 billion and emerging-market funds, $3.5 billion. Low interest rates and high corporate earnings are driving investor conviction in fresh upside to stocks, the strategists wrote in a section titled “Wings of Icarus,” saying the bullish positioning will change if there’s a reversal in the two factors.
A correction in equities will only occur once real GDP forecasts, wage inflation and Treasury yields rise above 3 percent, and the S&P 500 crosses 3,000, according to Bank of America’s client marketing feedback. The U.S. equity benchmark is about 200 points away from that threshold.
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