Finimize - 🚨 A sell signal is flashing

What’s going on here?

Professional fund managers have been ditching cash and diving into US stocks at record speed – hitting levels that Bank of America interprets as a warning for global markets.

What does this mean?

Bank of America’s latest fund manager survey paints a very gung-ho picture: the respondents say their cash holdings are at an important low of just 3.9%. Their US stock allocations, meanwhile, are at a record high: 36% above the usual benchmark levels (i.e. “overweight”). And their optimism is soaring too. Just 6% of respondents were worried about a global recession and 80% saw more interest rate cuts within a year. Meanwhile, Citigroup’s “panic/euphoria” indicator echoes the party-like-it’s-1999 vibe, with a euphoria level seen only once since the dot-com bubble. Sure, these are just two views of the market, but their message is clear: it’s a bull market party – at least, while it lasts…

Why should I care?

For markets: Overconfident and overexposed.

When optimism runs this hot, stocks tend to take a tumble. Since 2011, every time fund managers have been this “underweight” on cash, it’s coincided with a major peak and subsequent fall in share prices. And when cash holdings have dipped below the 4% level – a Bank of America “sell” signal – global stocks have suffered an average loss of 2.4% in the following month.

The bigger picture: Too much swagger, too little caution.

Even if you think that US shares will rally some more, it’s hard not to worry a little about longer-term returns. And that’s not just because of stocks' sky-high valuations. Right now, nearly 51% of the fund managers’ assets are parked in stocks – close to an all-time record. That particular measure of “investor positioning” is historically one of the best gauges of ten-year returns – if not the best. And right now, it’s warning about the potential for a zero-return decade in US stocks.

What’s going on here?

UK wage growth sped up more than expected in the three months through October – and that’s likely to be a key focus for the Bank of England (BoE) this week.

What does this mean?

This is a good news, bad news situation. The good news is that, in the UK paychecks have been rising faster than inflation. Regular wages jumped 5.2% in the three months leading up to October – up from 4.9%, with private-sector pay leading the pack at 5.4%. And those figures could lift even more: public-sector pay raises just took effect in November. So it looks like cash-strapped Brits are finally getting a break. The bad news? Inflation has a way of catching up. See, more money in folks’ pockets means higher demand for goods and services – and meatier payrolls mean that businesses might have to nudge prices upward to cover their costs.

Why should I care?

For markets: Bye, December rate cut.

This data feels like the final nail in the coffin for any potential interest rate cuts at the BoE’s last meeting of the year. With price pressures lingering just below the surface, lowering borrowing costs now would risk stoking those inflation fires all over again – the last thing anyone wants. That’s why traders now increasingly expect the central bank to sit on its hands: they’re putting the odds of a small rate cut at just 55%, down from 90% before this report.

The bigger picture: The guest that just won’t leave.

Inflation may be closer to the BoE’s target, but that doesn’t mean prices are returning to the level of the good old days. Consumers are simply stuck on a higher-price plateau, and it’ll take time (and paycheck increases) for their pocketbooks to catch up – especially if they’re not sitting on fat bank accounts. Of course, getting ahead will be even trickier if inflation sneaks back up before they get a breather.