In a note sent out this morning, Bank of America Merrill Lynch has a warning for investors:
Investors
remain trapped in ?The Twilight Zone?, the transition period between
the end of QE and the first rate hike by the Fed, the start of policy
normalization…until (a) the US economy is unambiguously robust enough
to allow the Fed to hike and (b) the Fed?s exit from zero rates is seen
not to cause either a market or macro shock (as it infamously did in
1936-7), the investment backdrop will likely continue to be cursed by
mediocre returns, volatile trading rotation, correlation breakdowns and
flash crashes. For this reason we continue to advocate higher than
normal levels of cash, adding gold and owning volatility in mid 2015.
Given extremities of liquidity, profits, technological disruption,
regulation, income inequality?potential for a cleansing drop in asset
prices cannot be dismissed. Most likely catalysts: Consumer, Rates,
A-shares, Speculation, High Yield.
The note also highlights two interesting disconnects in the markets:
Investors
say they are optimistic, but there is a high level of cash on the
sidelines U.S. stock prices are at record highs, but equity funds are
seeing outflows
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