Survey: Stagflation anxiety driving big investors out of stocks

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No more wondering why stocks are back in a funk: It’s because the people who invest the big money now have a truly dismal view of the equity market’s prospects.

That’s the takeaway from Merrill Lynch & Co.’s latest monthly survey of about 200 professional fund managers worldwide who control more than $700 billion in assets.

The June survey, conducted the 6th through the 12th, indicates that the risk of stagflation -- rising inflation, rising interest rates and weak economic growth -- ‘is beginning to create a major headwind for equities,’ Merrill says.

Fund managers ‘have reacted to this unpalatable combination by reducing their exposure to equities and raising their cash positions.’

Three numbers from the survey show just how dramatically investors’ perceptions have shifted:

-- The net percentage of managers who say they now are ‘underweight’ in stocks (meaning they’ve cut back much more than normal in asset-allocation portfolios) jumped to 27% from just 5% in May. The June reading is the most bearish in a decade of survey results, Merrill says.

-- The net balance of managers who believe stocks to be ‘undervalued’ plunged to just 1%. It had been 25% in the March survey. ‘This seems consistent with a world where growth is set to disappoint and where both long- and short-term interest rates are expected to rise on the back of inflation concerns,’ Merrill notes.

-- A net 81% of managers believe that analysts’ consensus corporate earnings estimates for the next 12 months are too high.

Is there a silver lining here? We all know that it’s often precisely when the crowd is at its most pessimistic about stocks that the market is likely to rally.

But that isn’t always true. Sometimes, the crowd is right, at least for a while -- if for no other reason than that investors, by engaging in group-think selling, can make a bear market a self-fulfilling prophecy.