Fund manager pessimism has fallen to its lowest level in more than a decade as investors brace for a looming recession due to the of the Federal Reserve war on inflation burning, according to a monthly survey by the Bank of America.
Bank of America surveyed nearly 300 CIOs, asset allocators and portfolio managers for the monthly survey, which was conducted July 8-15 – just after the release of a Labor Department report last week that showed the the consumer price index increased by 9.1% in June compared to a year ago, exceeding market expectations. It marks the fastest rate of inflation since December 1981.
The survey revealed a “disastrous level of investor pessimism”, surpassing that of the 2008 financial crisis as well as the early days of the COVID-19 pandemic, when the virus crippled large parts of the national economy. Investors, meanwhile, are hoarding cash, with cash levels reaching over 6% – the highest since 2001.
A total of 58% of fund managers said they took less than normal risk.
WHY IS INFLATION STILL SO HIGH, AND WHEN WILL IT START TO COOL DOWN?
Moreover, fears of a recession have reached levels not seen since May 2020, at the height of the pandemic. Investor sentiment is still bearish, according to the survey.
There are growing fears on Wall Street that the Fed could trigger a slowdown as it raises interest rates at the fastest pace in three decades as it races to catch runaway inflation.
Fed policymakers in June approved a 75 basis point interest rate hike – the first since 1994 – pushing the federal funds target range from 1.5% to 1.75%. Another hike of this magnitude is on the table in July amid signs of stubbornly high inflation, Chairman Jerome Powell told reporters after the meeting, prompting investors to reassess the economic outlook.
Officials also set an aggressive course of rate increases for the rest of the year. New economic projections released after the two-day meeting showed policymakers expect interest rates to hit 3.4% by the end of 2022, which would be the highest level since 2008. .
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Rising interest rates tend to create higher rates on consumer and business loans, which slows down the economy by forcing employers to cut spending. Mortgage rates are already approaching 6%, the highest since 2008, while some credit card issuers have raised rates to 20%.