Investor sentiment saw its largest jump in nearly four years during October amid resilient economic data and the start of interest rate cuts from the Federal Reserve.
In Bank of America's October Global Fund Manager Survey, investor sentiment rose to a reading of 5.6 from 3.8, marking its largest one-month increase since June 2020. The broad measure of sentiment takes into account investors' allocations to cash and equities as well as their economic growth expectations.
Allocations to bonds and cash plunged in October, according to BofA's survey, as investors appeared more confident in the economic outlook. The drop in cash allocations fell to a level that BofA noted is often a near-term "sell signal." But when looking at other broad measures, the firm's "big sell signal" hasn't been triggered yet.
The survey of 195 global participants was conducted from Oct. 4 to Oct. 10. The first day of responses was on the same day the blowout September Jobs report helped quell recession fears.
Just 8% of respondents said they see a "hard landing" for the global economy over the next 12 months. That marked the lowest level of respondents fearing a situation where restrictive central bank policy leads to an economic downturn in four months.
The optimism from investors reflects the recent market action.
The S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) have both surged, hitting several record highs, including closing at all-time highs on Monday. Artificial intelligence market leader Nvidia (NVDA) closed at its first record high since June on Monday. More speculative areas have rallied too, with cryptocurrencies bitcoin (BTC-USD) and ethereum (ETH-USD) both gaining more than 5% on Monday.
Tuesday's Bank of America Survey did come with a sign of caution, though, as hyper-optimistic investors can sometimes be considered a sign of a near-term top in the market. Cash allocations among respondents fell to 3.9% in October. Bank of America noted that any reading under 4% can be considered a "sell signal."
Since 2011, the worldwide equity index iShares MSCI ACWI ETF (ACWI) has declined by 2.5% on average in the one-month period following sell signals and fallen 0.8% over the next three months, per BofA.
Still, there are plenty on Wall Street who think optimism among investors has further to run before the current bull market rally hits a true bump in the road.
"We are in 'goldilocks zone', where investors are rightly trying to pick winners and avoid losers but are not so optimistic that they have thrown caution to the wind," DataTrek co-founder Nicholas Colas wrote in a note to clients on Tuesday when making the case for the stock market rally to keep rising higher.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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