Fund managers are buying shares. Investors are being less risk averse. Is it a warning sign?
What an amazing rebound it's been: The FTSE 100 is up over 40% since March. Marks & Spencer (LSE: MKS) and Barclays (LSE: BARC) shares are now both up over the past 12 months. Even BP (LSE: BP) is up slightly, despite the oil price collapsing.
It's like the crash of 2008 never even happened.
Everything Is Fine, People. Everything Is Fine!
That's the general takeaway from Merrill Lynch's Survey of Fund Managers for August. And it's a frightening one, really.
The survey, consisting of 204 fund mangers controlling more than half a trillion dollars in assets, shows that market optimism is now about as high as it's been since 2007.
Among the survey's findings:
- Average cash balances have shrunk to 3.5%. That's the lowest level since July 2007.
- 34% are "overweight" equities (shares). That's the highest level since October 2007, when the Dow Jones topped out above 14,000 and the FTSE 100 was above 6,700.
- 75% expect the global economy to strengthen in the next 12 months -- the highest percentage since November 2003.
- Seventy percent expect global corporate profits to rise in the next year. That's up 51% over last month.
- Confidence in corporate health is the highest it's been since January 2004.
- Merrill's "Risk and Liquidity Indicator," a gauge of investors' appetite for risk, is at the highest level in two years.
Ready for the survey's most telling finding? "With four out of five investors predicting below trend growth for the year ahead, a nagging lack of conviction about the durability of the recovery remains."
Bargains Are Out There
I don't necessarily disagree with the fund managers. We've avoided the abyss, and bargain shares can still be found, especially large-cap dividend paying companies.
But a situation where deep-pocket investors are giddy, optimistic, and lacking conviction about the durability of recovery is dicey. It's a sign that people are expecting the best, yet ready to jump ship at the slightest hint of anything less.
This doesn't mean we're about to run off a cliff. In fact, November 2003 -- the last time we were this optimistic about the global economy -- was a great time to invest (the S&P 500 and the FTSE 100 both gained 50% over the next four years).
And I'll say it again: Bargains are out there. As fellow Fool Bruce Jackson pointed out yesterday, high-quality companies like Unilever (LSE: ULVR) and Vodafone (LSE: VOD) still trade at attractive valuations. Heck, Prudential (LSE: PRU) trades at just over seven times forward earnings. All isn't lost for patient, bargain-hunting investors.
Could This Overconfidence Spell Trouble?
But the sudden surge of optimism and market activity will be seen by some as a sign that we're back at the same unquestioned confidence that brought us down in the first place. The past decade -- no, all of history -- has been underlined by wild swings in investor emotion where, in hindsight, the masses run too far in extreme directions. Think about that.
This isn't market timing. No one's saying that shares can't and won't go higher from here. But a lot of people are now counting on everything to go right. And that's a scenario more likely to end in tears than triumph with an economy as fragile as it is.
Is The Market Overvalued?
What do you think? Is the market getting ahead of itself at these levels? Take a moment to weigh in with our Fool poll on the popular Paulypilot's Pub - Macro Topics discussion board.
More on the economy and the markets:
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> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who doesn't have an interest in any of the companies mentioned in this article.
