`Buy in May and Sell the Rip' as Global Growth Pessimism Lingers

(Bloomberg) -- Coming off one of the rosiest earnings seasons of the bull market, fund managers are seeing the glass half empty.

Just a net 1 percent of investors surveyed by Bank of America in May said they expect an acceleration in global growth, the lowest share since February 2016, when the initiation of the Federal Reserve’s tightening cycle coupled with fears of a hard landing in Chinese activity combined to trigger a sharp retreat in risk assets.

Pessimism on the economic backdrop, cash levels of 4.9 percent, and an unwillingness among those surveyed to reallocate toward bonds unless the 10-year Treasury yield rises all bode well for stocks in the near-term, write a team led by Chief Investment Strategist Michael Hartnett.

"Buy in May then sell the rip," they say in the bank’s monthly Fund Manager Survey, who note that the consensus is generally positioned for stocks to continue to rise with no recession dawning until 2020.

Investors have been intently focusing on the potential deceleration in the global growth backdrop even as stellar quarterly reports rolled in, best illustrated by the selloff in Caterpillar Inc. after its management said that their results would be the "high water mark" for the year. BofA’s survey showed the net share thinking profits will improve slumped to the lowest level since the U.K. vote to leave the European Union.

Even so, research from RBC Capital Markets has showed that peaks in profit growth don’t necessarily lead immediately to bear markets as long as the economic expansion stays intact.

Bank of America’s macro indicator -- an amalgamation of fund managers’ evaluation of inflation, capital spending, risk appetite, and equity as well as bond positioning -- also fell for the sixth straight reading, sinking into negative territory for the first time since November 2016. Concerns about the state of Corporate America’s balance sheet are also creeping to the fore, with the share that would like to see firms reduce leverage swelling to a fresh eight-year high.

Owning the U.S. tech FAANG quintet (Facebook, Amazon, Apple, Netflix and Google’s parent Alphabet) as well as the Chinese BAT trio (Baidu, Alibaba and Tencent) was judged to be the most crowded trade for the fourth straight month following their renewed advances.

The survey was conducted May 4-10, a stretch during which Caterpillar executives clarified that their comment was meant to be taken seriously, but not literally in reference to financial markets.

To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net.

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Andrew Dunn

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