Analysts’ Bullishness Means Stocks May Tank, BofA Warns

Bank of America’s contrarian stock indicator, which has a devoted following, signals that we may well be on the brink of a sharp sell-off. Perhaps as a result, the stock market had a small downturn Tuesday, with the S&P 500 falling 0.8%.

The so-called Sell Side Indicator, constructed using analysts’ calls every three months, is in a bullish mode now. The idea behind this gauge is that, when sentiment is bullish, that’s a sell warning. And vice versa for when the groupthink is bearish.

By this metric, the market indicator (of how bullish these analysts are) is just 1 percentage point away from a too-optimistic-for-its-own-good sell signal, the report declared. “We’ve found Wall Street bullishness to be a reliable contrarian indicator,” wrote Savita Subramanian, equity and quant strategist at BofA Securities, and her team.

The note said the indicator has been more accurate vis-à-vis 12-month S&P 500 returns than other popular market timing models, such as the Fed Model. The latter yardstick compares expected corporate earnings yields and those of Treasurys, and it has zero to do with the Federal Reserve.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

The BofA indicator last emitted a stark warning signal in June 2007, the report said. Stock returns averaged minus 13% on an annualized basis in the three years after the jeremiad. The report doesn’t reveal the timespan, but that’s how the math works out.

There are plenty of bullish conditions around. Yesterday saw the easing of the strong rise of the benchmark 10-year Treasury yield—when bond yields are going up, it’s often thought to be not good for equities.

What’s more, regulators have approved the deployment of Johnson & Johnson’s COVID-19 vaccine. And, on the Washington front, the odds appear good that the Biden administration’s $1.9 trillion relief package will win Congress’ approval.

The Sell Side Indicator rose to 59.2% from 58.4% in February, growing more optimistic. This is near its highest point in a decade and close (1.1 point away) to the statistical sell threshold, by BofA’s reckoning.

Nevertheless, Treasury yields are indeed trending upward and stock valuations are lofty. Although 10-year T-note yields have descended from a peak of 1.61% last week, a climb back above that could propel investors to shift into bonds from stocks, the report said. And stocks’ high price-to-earnings (P/E) multiples indicate below-average annualized returns of 7% or so in the future, according to the bank.

The report also includes other caveats—such as that the indicator might only be flagging that tepid market increases lie ahead, as opposed to a slump, perhaps with gains on the order of 7% yearly. This level would be short of the double-digit returns the S&P 500 has generated over much of the past five years (big exception: 2018’s negative 4.4%).

Diehard stock investors would be best served favoring sectors “tethered to the real economy,” the strategists said. In other words, cyclical, value, and small-cap stocks, which BofA feels outperform as the economy reopens. Avoid the long-dominant growth names, the bank’s strategists admonished.

Morgan Stanley: Buy Inflation-Sensitive Stocks

‘Forever’ Investor Buffett Ditches Stocks He Just Bought

Tags: Bank of America, Bearish, bullish, Coronavirus, COVID-19, COVID-19 vaccine, price-to-earnings multiples, S&P 500, Sell Side Indicator, sell-off, Stock Market, Treasury yields, vaccines

K. Niles Bryant

Bowdoin College has promoted K. Niles Bryant to be the new CIO of its $1.8 billion endowment, effective July 1. Bryant will succeed Paula Volent, who will step down at the end of June after more than 20 years on the job.

“Niles’ exceptional experience and skills, his record of achievement, and his deep commitment to Bowdoin’s mission make him the ideal person to succeed Paula,” Bowdoin President Clayton Rose said in a statement. As a member of Bowdoin’s senior leadership team, Bryant will report to Rose.

Paula Volent

Bryant will take the helm a little more than a year after joining Bowdoin’s investment office. He started in April as director of investments. He previously was director of real assets for the Gordon and Betty Moore Foundation for nearly 12 years, and before that was associate director of investments at the Carnegie Corporation of New York for over four years.

Prior to moving into the financial sector, Bryant was an associate at the New York City law firms of Dewey Ballantine and Winston & Strawn. He earned an undergraduate degree in classical archaeology at the University of Michigan and a law degree at the Duke University School of Law, as well as an MBA from Dartmouth College’s Tuck School of Business.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

“Niles is uniquely positioned for this leadership position at Bowdoin,” Volent said in a statement. “During this recent challenging period, Niles has worked side by side with me and our investment committee on managing Bowdoin’s portfolio, augmenting the investment team, and carrying out our due diligence on potential opportunities.”

Volent has not yet revealed her post-Bowdoin plans other than to say that she will be “taking on new challenges.” She leaves her post after overseeing the endowment’s growth from just over $465 million during the summer of 2000 to $1.8 billion as of the end of June.

The Bowdoin endowment consists of more than 1,700 individual funds, and, as of June 30, had three-, five-, and 10-year annualized returns of 10.7%, 8.5%, and 11.6%, respectively.