Where Have All the Bulls Gone?

VT Tyndall Unconstrained UK Income Fund

Where Have All the Bulls Gone?

Just back from the Easter break and we don’t have any particularly new insights to share this week. Instead, we thought we’d highlight some of the more interesting charts we have seen lately. As regular readers will be aware, we have a more optimistic view on the economic outlook than many. We are by no means oblivious to the headwinds to growth that exist currently, and we fully expect some form of growth slowdown in the months ahead. However, we think there are important offsetting features that are generally being ignored in the cacophony of warnings of imminent global recession. Whilst trite we admit, we can’t help but ask the question once again – when did the consensus ever forecast a recession correctly? Maybe it’s different this time…..


According to the widely followed American Association of Individual Investors sentiment survey, retail investors are in the 4th most bearish frame of mind, on a quarterly basis, since 1988.

Not to be outdone, institutional investors optimism on the global growth outlook recently hit an all-time low according to the popular Bank of America Global Fund Manager Survey (below).


With such a dramatic collapse in growth optimism it is perhaps no wonder that global recession has replaced the Ukraine conflict as the biggest tail risk investors currently fear.


Given the above, you might expect ‘quantitative’ models that have historically flagged recession risks in a timely fashion to be sending warning signals again. However, that doesn’t appear to be the case from at least one well followed model as shown below.


Amongst the seemingly numerous data points to worry about, the inversion of the 10-year – 2-year yield curve appears to be drawing the greatest amount of angst as far as we can tell. Whilst historically a reliable indicator for forthcoming economic weakness, the lead time is hugely variable and the impact on equity markets is not straightforward, nor obviously short-term bearish.


The chart below, from Goldman Sachs, is perhaps a reminder too that whilst financial conditions are undoubtedly tightening currently, they are still, in a historical context, extremely loose and will likely remain so for some considerable period yet.


The real income squeeze on consumers, driven by elevated inflation, is hardly new news and the UK is certainly in the eye of the storm. However, it is worth remembering just how robust real earnings have been over the last couple of years as shown below – a period which includes the Covid-19 recession!


It is not as if the income squeeze has been lost on stock market participants either. Despite still buoyant near-term trading conditions, outflows from consumer discretionary stocks have recently been the most negative since 2008.


Meanwhile, could we finally be on the cusp of ‘peak inflation’? Bank of America certainly think we are there or thereabouts, with a fairly precipitous decline to come over the next few months.


As we noted at the outset, we are not oblivious to the growth headwinds that exist today. However, our strong suspicion is that the degree of bearishness that has developed as a consequence is excessive, with very little discussion of potentially contrasting positive developments. Equally, in a world dominated by factor investing, thematic baskets and Exchange Traded Funds, we are convinced that this bearishness gets reflected in stock markets quickly and often indiscriminately. These are exactly the conditions that create excellent medium term stock picking opportunities for those willing to extend their investment horizon beyond the next few minutes.

21st April 2022
Read time : 4  mins

This content is intended for professional clients only.

Data source (unless otherwise stated): Bloomberg.
Not for retail distribution – this document is intended for professional clients only

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