It almost defies reason that the stock markets are hitting new all-time highs when the American economy was almost shocked into depression status by the COVID-19 pandemic. After a massive 35% drop in less than a month, one of the highest velocity sell-offs in stock market history, we witnessed officially the largest 100-day rally ever for the S&P 500 Index, up more than 50%. In addition, while hitting that mark, we also set a record for the shortest bear market ever as the S&P 500 and the Nasdaq hit those all-time record highs.

Despite this wild roller-coaster ride, many of the top hedge fund and mutual fund portfolio managers remain surprisingly positive. The research team at BofA Securities has posted some of the more salient points from its recent survey, which many investors may be surprised to read.

1. This was the most bullish fund manager survey since February of 2020 and, despite the massive run, the consensus among respondents seems to be that current positioning is not dangerously bullish.

2. There is the potential for what is known as “peak policy” to cause substantial volatility in September, which traditionally can be a volatile month. However, those surveyed feel that only a very disorderly rise in interest rates could cause this to happen. That now looks very unlikely.

3. Investors are saying that the huge market run is no longer a bear market rally. In fact, 37% are expecting a W-shaped recovery, while 31% are looking for a U-shaped one.

4. U.S. technology is the most crowded position for the managers, which should come as no surprise to anybody who has watched the stunning run of the top mega-cap technology giants. The biggest tail-risk for the managers is a dramatic “second-wave” of COVID-19 to hit.

5. Asset allocation among the managers remains skewed to U.S. growth stocks, but there is definitely some interest among those surveyed toward inflation assets. Tangible assets, like real estate and commodities, historically have been seen as inflation hedges. Some specialized securities can maintain a portfolio’s buying power, including certain sector stocks, inflation-indexed bonds and securitized debt.

6. They note that there is definitely contrarian risk on a COVID-19 vaccine and on higher interest rates. The managers feel that the way to play those possibilities is being long small-cap stocks and short technology. Hedging a sell-off due to political volatility could be accomplished via being short health care stocks.

Needless to say, we are in uncharted territory for investors, and it makes sense to have a proper asset allocation in place that includes a 5% to 7% position in precious metals like gold and silver. In addition, given the massive run in the markets, investors should take some profits to build up a 10% or even more cash position, because another lockdown like the one we saw back in the spring could indeed knock the country into a depression. That scenario, while probably a longshot, still exists and should be considered when portfolio planning.

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