Investor pessimism surged to the highest level this year in May amid fears over a looming recession and the threat of a credit crunch for U.S. consumers and businesses, according to Bank of America’s global fund manager survey.
Fund managers’ optimism has tumbled 28 percentage points since February, the largest two-month decline since last April – shortly after Russia invaded Ukraine. About two-thirds of investors – roughly 65% – are bracing for a weaker economy over the next year, the highest since December.
Despite concerns over a weaker economy, a majority of investors see a soft landing as the most likely outcome for global economic growth and expect just a small contraction in earnings. At the same time, nearly half of investors project a recession in the next 12 months.
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It marked the most bearish survey of 2023.
About 33% of participants in the survey identified the bank credit crunch and a global recession as the top risk to markets. That compares to about 29% who highlighted sticky inflation that keeps central banks on a hawkish trajectory as the biggest threat.
Another 15% are worried about geopolitics – such as the war in Ukraine or tensions between China and Taiwan – worsening, while 12% think the biggest threat is a systemic credit event. Just 8% of respondents identified the looming debt ceiling deadline as the biggest tailwind to global economic growth.
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The clock is running out for lawmakers to lift the debt limit: Treasury Secretary Janet Yellen warned earlier in May the country could run out of money as early as June 1 if the ceiling is not raised.
The BofA survey comes amid a prolonged standoff over the debt limit. Republicans, who control the House, passed a bill that raises the borrowing limit, and also includes budget cuts. In turn, President Biden and his fellow Democrats, who control the Senate, have insisted on a “clean” debt ceiling bill and will negotiate any spending cuts separately.
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Although an overwhelming share of investors – about 71% – expect a debt ceiling resolution ahead of the so-called X-date, that is a marked drop from 80% who anticipated a deal in April.