Wall Street fund managers appear unprepared to inflation

Under the influence of the government's large-scale stimulus and supply chain problems, high inflation looks more persistent. Even Fed Chair Powell has admitted this and no longer insists on the "temporary" theory on inflation. But Wall Street active funds aren't ready for that outcome. Bank of America data shows that mutual funds remain significantly underweight (12%) inflation-sensitive stocks and overweight (3%) "inflation-resistant" stocks; if inflation continues to rise, performance for a longer period is likely be weak.

In fact, with major U.S. stocks down as much as 5% on average since Thanksgiving, BofA's head of equity and quantitative strategy Savita Subramanian wrote in a report last week that actively managed funds don't appear ready for the fast-changing environment. Fund managers are unprepared to inflation. They overweight large-cap stocks, and heavily concentrated in growth stocks rather than value stocks. Fund managers' continued preference on large-cap and mega-cap stocks could be countered by the inflation. Bank of America expects small-cap stocks to outperform large-cap stocks in 2022 as the global economy continues to recover from the pandemic, if the Omicron variant doesn't have a huge impact.

The Fed's move towards a rate hike will bring more risk to stock investors, and the market will go through a tough tug-of-war.