Yun Li
CNBCNovember 1, 2022
Sentiment on Wall Street has gotten so bad that strategists have finally started to throw in the towel, and that could trigger a reliable buy signal from Bank of America. The Bank of America Merrill Lynch Sell Side Indicator, based on a survey of Wall Street strategists’ asset allocation recommendations, has reached its lowest level since early 2017. The bank said historically, when the indicator was at current levels or lower, subsequent 12-month S&P 500 returns were positive 94% of the time and the median 12-month return was 22% higher.
“Equity sentiment resumes its descent toward a ‘Buy’ signal,” Savita Subramanian, Bank of America Securities’ head of U.S. equity and quantitative strategy, said in a note. “We have found that Wall Street’s consensus equity allocation has historically been a reliable contrarian indicator.” The indicator simply measures how the biggest portfolio managers are positioned. Bank of America said a range of 60% to 65% represents the traditional “normal” equity allocation for a balanced fund. The 2008 financial crisis pushed the indicator below that range for the first time since 2000.
Currently, that level stands at 52.8% in October after sliding 6 percentage points this year.
Bank of America said strategists started to recommend an increased allocation to bonds as yields continued to rise.
“The rising debate over whether bonds now look more attractive than stocks marks a departure from the post-GFC era when TINA (‘There is No Alternative’ to stocks) was the prevailing argument,” Subramanian said. The stock market has been on a roller-coaster ride this year as the Federal Reserve rushed to raise interest rates aggressively to tame inflation. The central bank is widely expected to hike rates by 75 basis points on Wednesday for a fourth consecutive time. The S&P 500 is down more than 19% this year. To be sure, the Sell Side Indicator is only one of the five metrics Bank of America takes into account for its official market forecast. The bank sees the S&P 500 ending the year at 3,600, about 6% lower from where it trades now.