Investors have fled to bonds with record amounts as 'extreme bearishness' drives them away from stocks

Jean-Francois Monier/ AFP/ Getty Images
  • Investors poured a record amount of money into bonds over the past week, according to a fund manager survey conducted by Bank of America Merrill Lynch.
  • That came at the expense of stocks, which saw massive outflows and a large reduction in allocation, BAML data shows.
  • The stock market is facing a series of simultaneous headwinds, perhaps most notably the prospect of a hawkish Federal Reserve decision on Wednesday.

Investors fleeing the stock market are seeking shelter in bonds to an unprecedented degree.

A recent Bank of America Merrill Lynch survey of 243 fund managers overseeing nearly $US700 billion found that bonds allocations grew by 23 percentage points over the past week. That’s the biggest increase on record.

Those investors reduced holdings in stocks by 15 percentage points over the same period, according to the data.

12 18 18 bond rotation COTDBank of America Merrill Lynch

The shift highlights the risk-averse sentiment that’s pervaded the investing landscape in recent months, as equities have suffered a series of painful pullbacks.

It also matches BAML data from last week that showed traders pulled a whopping $US27.6 billion out of stocks in the week ended Dec. 12, the second-biggest outflow of all time. On a global basis, a record $US39 billion was yanked from stocks worldwide over the same period.

These developments have pushed the market close to “extreme bearishness,” strategists at BAML wrote in a client note. And that sentiment is being at least partially fuelled by dismal expectations for continued economic growth.

Roughly 53% of those surveyed by BAML think the global growth will weaken over the next 12 months, which is the worst outlook on the global economy since October 2008 – five months before the stock market bottomed following the financial crisis.

Screen Shot 2018 12 18 at 9.24.24 AMBank of America Merrill Lynch

Beyond the prospect of slowing economic growth, investors are being troubled by a handful of other notable headwinds. They’re still worried about the fallout from President Donald Trump’s trade war, a potential global growth slowdown, the pace of Federal Reserve tightening, and new vulnerabilities in tech stocks.

The Fed in particular is at the forefront of investor minds as they prepare to announced their rate-hike decision on Wednesday. A bearish outcome – which would likely involved a 25-basis-point increase and accompanying hawkish commentary – could trigger recession concerns and send US stocks into a bear market, according to BAML.

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