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Investor pessimism highest since 2008 financial crisis as inflation rages: BofA

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Fund manager pessimism has sunk to the lowest level in over a decade as investors brace for a looming recession as a result of the Federal Reserve's war on scorching-hot inflation, according to a monthly Bank of America survey.

Bank of America surveyed nearly 300 CIOs, asset allocators and portfolio managers for the monthly survey, which was conducted from July 8-15 — just after the release of a Labor Department report last week that showed the consumer price index rose 9.1% in June from a year ago, exceeding market expectations. It marks the fastest pace of inflation since December 1981.

The survey revealed a "dire level of investor pessimism," surpassing that of the 2008 financial crisis as well as the early days of the COVID-19 pandemic, when the virus shut down a broad swath of the nation's economy. Investors, meanwhile, are stockpiling cash, with cash levels rising to more than 6% — the highest since 2001.

In total, 58% of fund managers said they are taking lower than normal risks.

WHY IS INFLATION STILL SO HIGH, AND WHEN WILL IT START TO COOL?

What's more, fears of a recession have jumped to levels not seen since May 2020 at the height of the pandemic. Investor sentiment is still bearish, the survey showed.

There are growing fears on Wall Street that the Fed will trigger a downturn as it raises interest rates at the fastest pace in three decades as it races to catch up with runaway inflation.

Fed policymakers in June approved a 75-basis point interest rate hike — the first since 1994 — pushing the federal funds target range to 1.5% to 1.75%. Another hike of that magnitude is on the table in July amid signs of stubbornly high inflation, Chairman Jerome Powell told reporters after the meeting, prompting investors to reassess the economic outlook.

Officials also laid out an aggressive path of rate increases for the remainder of the year. New economic projections released after the two-day meeting showed policymakers expect interest rates to hit 3.4% by the end of 2022, which would be the highest level since 2008.

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Hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending. Mortgage rates are already approaching 6%, the highest since 2008, while some credit card issuers have ratcheted up their rates to 20%.