- Cash holdings have fallen sharply as investors chase the rally in stocks, Bank of America said.
- The level of cash under management fell to 3.9% in December, triggering a "sell signal" in the stock market.
- When cash dips to that level, global stocks typically decline 2.4% in the following month.
"Super-bullish" investors have drained cash holdings to a level that typically precedes a stock market decline, Bank of America said this week.
The bank's latest fund manager survey found that cash allocations are at a record low, driven down by a record-high allocation into US stocks. Optimism ahead of Donald Trump's second term and ongoing interest rate cuts have propelled risk appetite higher, driving the rotation.
The level of cash among total assets under management fell from 4.3% to 3.9% this month, a level that constitutes a "sell signal" and which could prompt investors to lighten equity exposure.
Since 2011, this signal was triggered 12 times, prompting the MSCI All-Country World Index to slump 2.4% in the month that followed, according to the BofA analysts led by strategist Michael Hartnett. The index typically declines 0.7% three months after the sell signal.
Cash allocations fell 14% in December, marking the largest decline in five years. Allocations were this low only twice on record, and each instance coincided with a significant peak in risk assets, BofA wrote.
Earlier this month, Hartnett outlined expectations of an upcoming first-quarter "overshoot" in US stocks, given that investors are heavily exposed to assets benefiting from Donald Trump's presidency.
He further predicted that US market exceptionalism will peak in the second quarter, likely kicking off a major correction for US stocks. Asset managers might reallocate to cheaper international stocks, drawn in by huge easing of financial conditions in European and Asian markets.
Many other forecasters on Wall Street still expect the S&P 500 to notch further gains through 2025, though at a slower pace. The average analyst forecast calls for the benchmark index to gain about 8% next year, though uncertainty around the impact of some of Trump's protectionist policies remains high.