While earlier we showed the key highlights from the latest Bank of America fund manager survey, the two items that most readers, and traders, gravitate to, is i) what Wall Street thinks is the biggest tail risk at any given moment, and ii) what is the most crowded trade (in a notable departure, December's answer here was bitcoin).

In January according to 163 active fund managers with $510BN in AUM, the top 3 "crowded trades" are

  • #1 long FAANG/BAT (26%),
  • #2 short US$ (20%),
  • #3 short volatility (18%);

Notably, back in January Wall Street respondents said that "Short Vol" was the most crowded trade. In retrospect they were right.

What about tail risks? Here Wall Street believes that an inflation-induced bond crash (45%) remains at the top of the list of tail risks cited by investors; the top three are rounded out by a policy mistake by the Fed/ECB (18%) and market structure (13%).

This is the second month in a row in which inflation and bond crash remain the top risks. As BofA notes, a strong US$ and lower yields would be painful.

Meanwhile, even as traders fret about inflation and bond selloffs, they remain extremely optimistic, with 91% saying a recession is unlikely, while respondents were most bullish on profits since 2011. Here a caveat from BofA: strong EPS remains the most likely positive risk for stocks, while interest rate catalyst is slowly reversing, leaving EPS as lone driver for risk assets. This means that if, for whatever reason earnings fail to meet Wall Street's lofty expectations, the second - and far more violent part of the selloff - will begin.