BofA: investors are so optimistic that it's time to sell stocks

Vyacheslav Dvornikov

Oct 28, 2024

The share of cash or cash equivalents in managers' portfolios in October decreased to 3.9% from 4.2% in September, according to a survey conducted by Bank of America (BofA) from October 4–10.

At the same time, the survey showed the largest monthly jump in investor optimism with a total of $503 billion in assets under management since June 2020 — due to the Fed's rate cuts, new economic stimuli in China, and expectations of a soft landing for the US economy, BofA notes.

The percentage of managers with a higher share of stocks in their portfolio than the target level is 31% more than those with less. A similar indicator for bonds showed a record monthly decline to 15%.

All together — the decrease in the share of cash and bonds, and the increase in the share of stocks — triggers a 'sell signal' for stocks globally, strategists note. Since 2011, there have been 11 such signals, after which global stocks fell by an average of 2.5% per month and 0.8% over three months. The BofA Bull & Bear Indicator is still below the 'big sell signal.'

Regarding this news, two thoughts are spinning in my head. First, why do these data serve as a possible indicator that the stock market is likely to go down? After all, the fair value of stocks is determined by a company's ability to generate cash flows. And the market should strive for fairness.

What does the share of stocks in managers' portfolios have to do with it? The fact is that market value gravitates towards fair value in the long term. In the short term, the supply of stocks is inelastic — it does not increase if demand increases. And this means that the law of supply and demand applies, and with greater demand for stocks, their price will be higher.

Secondly, the situation should, of course, be viewed in a comprehensive manner. Other indicators, namely CAPE (Shiller P/E) ratios, excess (compared to bond yields) ERP (equity risk premium), or the price difference between the 25% most expensive and 25% cheapest stocks of large issuers, also indicate overvaluation.