'The stock market bears are coming out of hibernation': There's been a sharp shift in the market, RBC says

Youtube/WoodlandParkZooA bear destroys a campsite.
  • Investors have become significantly more bearish since September, according to a new RBC Capital Markets report assessing the “mood” of the stock market.
  • The firm took the pulse of institutional investors, surveying their outlooks on the stock market, economy, monetary policy, and other items.
  • The bears are still a “minority,” RBC notes, with around a third of respondents identifying as bearish on the US stock market over the next six to 12 months. That’s up sharply, however, from 17% of respondents in September.
  • The quarterly survey comes during a particularly brutal time in the market.

Big-money investors have become significantly more bearish this quarter compared to the last, according to a new report from RBC Capital Markets, underscoring how quickly sentiment has soured on the broader market as stocks have plunged from their highs.

“The stock market bears are coming out of hibernation,” a team led by Lori Calvasina, head of US equity strategy, wrote in the report detailing results of its quarterly equity-investor survey.

Although respondents were split in their outlooks (between bullish, neutral, and bearish views), those who identified as bearish had risen quite noticeably. “There was a clear shift since September, as those describing themselves as bearish or very bearish rose sharply,” the team said.

The S&P 500 has fallen 17% since hitting its all-time high hit back in late September. The stock market’s turbulence that began at the end of September has developed amid concerns over the Federal Reserve’s rate path – the latest increase came on Wednesday, as was widely expected.

The Federal Open Market Committee on Wednesday raised its benchmark interest rate for the fourth time this year and the ninth since the financial crisis and signalled it planned to hike rates twice in 2019, down from its previous forecast of three increases. But that wasn’t enough to calm investors’ fears that the Fed may be acting a bit too aggressively when it comes to rate hikes.

But it’s not just the Fed that has the stock market worried; the US-China trade war has also been a factor in the stock market’s weakness. Indeed, the spat has not yet come to pass, with signs of slowing growth globally and a strong economic cycle coming to an end.

“More than anything else, Mr. Powell added to the plethora of uncertainty that is facing the markets right now,” Matt Maley, equity strategist at Miller Tabak, wrote in a client note on Thursday morning.

“He has gone from very hawkish…to a lot more dovish…to both dovish & hawkish (on rates & balance sheet respectively) over the past few months. When you add to this uncertainty surrounding Brexit, Italy, France, Trump investigations, global growth and of course the trade/tariff issue…you get a situation where uncertainty is the mantra in the market place right now.”

The latest survey of US equity investors from RBC Capital Markets shows bearish sentiment has risen sharply.RBC Capital MarketsThe latest survey of US equity investors from RBC Capital Markets shows bearish sentiment has risen sharply.

Other notable findings from the firm’s report included:

  • In a signal stocks could have more room to fall, US equity future positioning has seen a “sharp unwind,” falling from their late September highs which were in line with positioning in January 2018 and prior to the financial crisis. While this means risk is somewhat reduced, RBC said that “it’s premature to declare stocks oversold.”
  • RBC found more than half of the survey’s respondents said their optimism was “waning,” with a notable pick-up since the prior quarter in the number of those who said they felt much less contractive on US stocks.
  • RBC found a steep decline in the number of those with a positive economic outlook. Back in September, most investors were optimistic on the US economy out six to 12 months back in September. Recently, there has been a pick-up in the number who say they are neutral to bearish over the same time frame.
  • Nearly half of respondents expect the next recession to begin in 2019 or 2020.
  • In a “free response question” as to which indicators or signals are informing investors’ views on the next recession, “monetary policy” was the top item listed among the 57 respondents.

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