Cash on the side

Good morning.?I'm senior editor Max Adams.?

There's a massive amount of cash on the sidelines right now as markets suffer through extreme bouts of volatility and investors remain skittish.?

Today we're taking a look at Bank of America's monthly survey of fund managers to see what's going on and what investors' cash positions can tell us about what the future might hold for the stock market.?

Let's get right into it.

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1. Investors' cash pile is the largest since April 2001.?Why is that significant? Well, according to Bank of America's fund managers' survey, it "screams" capitulation.?

That's according to BofA chief US investment strategist Michael Hartnett, who writes that the October survey "screams macro capitulation, investor capitulation, and crucially start of policy capitulation."?

The survey shows that cash as a percentage of portfolios stands at 6.1%, a 21-year high. That's compared to a long-term average of 4.8%.?

So what does this mean?

Investors are nervous.?They're holding more cash to avoid deploying it into terribly volatile markets. The capitulation part of this suggests that these survey respondents think that a bottom may be in, and their next move will be to deploy all this cash they've amassed while markets were under stress.?

Which bring us to the next part of BofA's prediction — that this cash pile will fuel a rally in 2023. "We still say 'big low, big rally' when Fed cuts become consensus," Hartnett said, referring to the long-awaited pivot by the US central bank away from the big interest rate hikes that have battered the stock market this year. A big low is still coming, Hartnett said, which could cause the Fed to panic.?

For the time being, investors should be looking out for "tasty morsels" of another bear market rally if Treasury yields stay below 4%. The 10-year note on Tuesday was yielding around 4.05%.

In other news:

2. High inflation and rising rates are bad news for US stocks, especially growth.?A hard-landing scenario could see the S&P 500 drop by another 14%, according to Goldman Sachs.?The bank named 22 profitable growth stocks that are set to turbocharge their sales and are trading at a bargain .

3. Investors seem less concerned about midterm elections than they have in the past, Goldman Sachs said. Just three weeks away, the elections will still likely have implications for areas of the stock market.?The bank shared two sectors that have historically outperformed the most in the initial months following midterms .

4.?Sentiment is unusually bearish as the crucial third-quarter earnings season gets underway, Wedbush said.?But analyst Dan Ives still likes software and cybersecurity stocks.?Here are 12 of his favorite tech stocks to own heading into the end of the year .

5. Target stock is more than 40% of its highs as excess inventories have weighed on profit margins.?The retailer could get a jolt when earnings are due next month and as the holiday season also nears.?Shares ?could bounce 24%, said Jefferies, which cited its?ability to withstand a tough economic environment marred by inflation .

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This newsletter was curated by Max Adams.