Fund managers are overwhelmingly anticipating next year to be a period of stagflation, with almost no one saying a turn into deflation is a worry, according to the latest survey by Bank of America.
An incredible 92% say they are expecting below-trend growth and above-trend inflation next year, the survey says. No one is expecting above-trend growth and below-trend inflation, and just 7% expect below-trend growth and below-trend inflation, the survey of 309 people managing $854 billion in assets finds.
The fund managers also were asked their biggest tail risks. Inflation stays high at 32%. Three other fears share joint billing in second place, at 18% each: geopolitics worsening, central banks staying hawkish, and a deep global recession. Only 1% cite debt deflation next year.
Not surprisingly given the macroeconomic views, fund managers are staying cautious: according to the survey, they are two standard deviations underweight stocks and two standard deviations overweight cash. The asset allocation is still very defensive, though there was a rotation into industrials and banks and out of utilities and tech last month.
Over five years, the fund managers anticipate 6.1% per year returns in the S&P 500
4.8% returns from U.S. corporate bonds and 4.2% returns from U.S. government bonds.
U.S. stocks last week enjoyed a strong rally on hopes that inflation has peaked, but the S&P is down 17% this year, and the Nasdaq Composite
has lost 28%.