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The smart money is feeling surprisingly upbeat Add to ...

The S&P 500 has tumbled about 100 points from its recent high, or nearly 7 per cent, and explanations range from concerns that the U.S. will go over its fiscal cliff, to worries that Greece won’t get its next round of financial assistance, to a slowing global economy, to disappointing quarterly results.

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That’s a long list of obstacles. But if professional money managers are any indication, there is also a lot of optimism simmering beneath the surface – suggesting that stocks could rally if a few problems fade from the headlines.

At least, that’s the impression from the latest Bank of America fund manager survey of 248 panelists, with a combined $695-billion (U.S.) in assets under management.

On China’s economy, confidence has bounced to a three-year high, with a net 51 per cent of respondents now expecting the country’s economy to strengthen in the coming year. That’s an amazing 46-percentage-point improvement over last month’s survey, suggesting that money managers have taken a big shift in their thinking.

On the world economy, there is also upbeat thinking. A net 34 per cent of respondents think the global economy will strengthen in the next 12 months, a jump of 14 points over last month’s survey and the strongest confidence since February 2011.

And on corporate profits, a net 4 per cent now believe earnings will improve in the next 12 months. While that might not sound encouraging, two months ago a net 28 per cent predicted a worsening profit scenario.

Rising optimism means that respondents are also leaning toward stocks and away from bonds. According to the survey, 42 per cent expect to sell government bonds in favour of higher beta equities – or stocks that tend to be more volatile than the underlying market. That’s up from 37 per cent last month.

“Momentum has gathered behind the idea that we are on the cusp of a ‘great rotation’ out of bonds and into equities,” said Michael Hartnett, chief investment strategist at Bank of America, in a note accompanying the survey’s results. “The only missing ingredient is a resolution to the U.S. fiscal cliff.”

The fiscal cliff – the automatic increase in taxes and decrease in spending that kick in at the start of 2013 if politicians are unable to come to an agreement to cut the deficit – has been hanging over the stock market for time. But it has become a looming crisis ever since Barack Obama won a second term as President last week, with the prospect of more gridlock in Washington. Since then, the S&P 500 has slumped 3.3 per cent – and the fiscal cliff clock, to mangle a metaphor, is ticking fast.

But is the fiscal cliff a realistic fear? Here are a few recent thoughts, and news items, about the matter.

Bloomberg News: “A majority of Americans expect the U.S. to go over the fiscal cliff at the beginning of 2013 and would blame Republicans if that happens, according to a poll published today. The survey by the Pew Research Center and the Washington Post found 51 per cent of those polled said they don’t think President Barack Obama and Congress will be able to agree on a package of tax increases and spending cuts....”

Wall Street Journal: “Barry Knapp, head of U.S. equity portfolio strategy at Barclays, turned more bearish after seeing the election results, arguing that the risk of fiscal-cliff disaster increased to more than half, from about 30 per cent before.”

Paul Krugman, New York Times: “So what should [President Obama] do? Just say no, and go over the cliff if necessary. It’s worth pointing out that the fiscal cliff isn’t really a cliff..., nothing very bad will happen to the economy if agreement isn’t reached until a few weeks or even a few months into 2013. So there’s time to bargain.”

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