Fund managers see ‘cracks in the bull’ market as trade war fears escalate

The correction featured the implosion of several ETFs that bet against market volatility, and that
“short-vol” theme went from being regarded as the most crowded trade in January to sixth on the list in March.

The “FAANG+BAT” trade is considered the most crowded and includes Facebook, Apple, Amazon, Netflix and Google-parent Alphabet, along with Chinese internet stocks Baidu, Alibaba and Tencent. Betting against the U.S. dollar is second on the most-crowded list.

Meanwhile, 74 percent of survey respondents see the global economy in the “late cycle,” which is the most in the history of the survey.

Fears of a trade war, dormant since the early days of the Trump administration, have re-emerged since the president slapped tariffs on imported steel and aluminum earlier this month. The threat of a wider conflict topped the list of fears with 30 percent of respondents, while inflation was next at 23 percent followed by global growth at 16 percent.

It’s the first time trade concerns topped the list since January 2017.

Those results mirror the most recent CNBC Fed Survey, in which trade also topped concerns, though 48 percent of respondents said they generally approve of how President Donald Trump is handling the economy.

In the BofAML survey, 87 percent of fund managers said protectionism would boost inflation and stagnation, the latter a term for sluggish growth with higher prices.

On the bright side, investors are optimistic about corporate profits, with 58 percent expecting global earnings per share by rise by more than 10 percent in the next 12 months. S&P 500 earnings are projected to jump 17 percent in the second quarter, according to FactSet.

Fund managers also are a little less afraid of rising bond yields. Survey respondents indicated a 3.6 percent yield on the benchmark 10-year Treasury note would trigger a move from stocks into bonds. A number of bond market veterans, led by DoubleLine’s Jeffrey Gundlach, have put the danger zone closer to 3 percent.

WATCH: The history of trade wars is not pretty.