A recent survey by Royal Bank of Canada showed that 58% of institutional investors are “bullish” or “very bullish” on the market right now. This could spell bad news for those hoping the worst of the drawdown is behind us.
The survey, conducted between March 25 and 31, shows that even after last month’s tumultuous ride, investors are more bullish today than they were back in December when everything was sailing along smoothly.
Even more concerning, 57% of investors say stock valuations are “attractive” or “very attractive” today. This is a new record for RBC’s survey.
“I’m concerned that we have not seen the lows yet,” said Lori Calvasina, RBC’s head of U.S. equity strategy.
“This surprisingly high level of bullishness supports our own view that we haven’t yet seen investor capitulation, echoing what we’ve seen in other data sets. We view capitulation as a necessary, though not sufficient condition for stock market bottoms in major drawdowns” she added in a note to clients last week.
These bullish investors believe that the Federal Reserve will continue supporting the economy with its zero-interest-rate policy and the $700 billion quantitative easing plan. They also believe that the economic impact of the coronavirus pandemic will be “manageable.”
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The 58% “bullish” or “very bullish” reading is the highest the RBC U.S. Equity Investor Survey has had since it debuted in early 2018.
Perhaps the most surprising data from the survey shows that despite the record-level of bullish optimism, a significant number of respondents believe there’s still plenty of pain to be doled out by the market.
Only 19% of those surveyed believe the market hit bottom in the first quarter. Meanwhile, 57% believe that we are going to see the market head lower and reach a new bottom this quarter. Additionally, 15% don’t anticipate stock bottoming until Q3 2020. The 9% of those surveyed believe we won’t see the bottom until Q4 2020 or later.
And despite all the chatter in the news about a quick economic recovery once new cases of coronavirus plateau, the RBC survey shows that investors aren’t quite as optimistic as some may hope.
Only 19% of respondents believe we will get a “V”-shaped recovery. 41% believe that we will see a ‘W’-shaped recovery and 35% see the country going through a slower “U”-shaped recovery.
Some banks on Wall Street are expecting massive GDP contracting as high as 30% during the second quarter. Those responding to the survey, however, weren’t quite so bearish.
Most believe that the country’s GDP won’t contract by more than 20% in any quarter. They also think that if we do get a recession, it will end in the fourth quarter.
It could be more bad news for the market if those numbers end up worse than predicted.
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“If evidence that the most negative GDP quarter will be worse than 20% and that the contraction will last beyond 3Q emerges, it is likely to destabilize the market,” the RBC strategists wrote. “If evidence emerges that the impact will be less severe, it can help the stock market stabilize and move higher” they added.