Stock markets are yet to see full capitulation, Sanford C. Bernstein strategists said, taking a contrary view to that of Bank of America Corp., whose survey showed that investors have already thrown in the towel.
“We have not yet seen capitulation in outflows from equity funds,” strategists Mark Diver and Sarah McCarthy wrote in a note on Wednesday. “In fact outflows, excluding Europe, have only just begun.”
By contrast, Bank of America’s July global fund manager survey showed on Tuesday that full capitulation had been reached after investor allocation to stocks plunged to the lowest since October 2008, while exposure to risk assets dropped to levels not seen even during the global financial crisis.
Adam Sarhan, founder and chief executive of 50 Park Investments, agrees with the Bernstein strategists.
“We still haven’t seen the classic signs of capitulation yet on Wall Street, but the stock market appears to be turning a corner, for now,” Sarhan said in a phone interview. “Do we have the classic signs of capitulations? No. The VIX and equity put call ratios are nowhere near extreme levels. We still haven’t seen tremendous amounts of fear on Main Street, but in the short term the stock market is set up for a bounce.”
Global equity markets have slumped this year on fears of a looming recession as hawkish central banks race to tame scorching inflation. Even so, stock funds have seen $181 billion in net inflows in 2022 while bond funds have been hit by $206 billion of outflows, according to a Bank of America note last week citing EPFR Global data.
“We may already have seen capitulation from bond funds,” Bernstein strategists wrote. “Significant selling in the second quarter has been followed by two weeks of net purchases so far in the third quarter.”
Bernstein strategists said that global equity fund flows have “remained remarkably resilient this year” and that most of the inflows occurred during the first quarter, followed by only minor selling of $8 billion in the second quarter even as markets were rocked by the highest inflation in decades and rising risks of economic stagnation.
Stocks have attempted to rebound recently on optimism that U.S. inflation was starting to peak and that would spark a shift in the Federal Reserve’s policy. The S&P500 was 0.6% higher on Wednesday, while the tech-heavy Nasdasq 100 advanced 1.2% in New York.
Piper Sandler strategists pointed out that weak first halves in U.S. equities have historically been followed by sizable recoveries in the second half of the year, even during recessions in 1932 and 1970.