One doesn't have to read our weekly flow reports showing that while algos and quants are busy buying stocks hand over first (because momentum) even as human and hedge funds investors continue to sell (see "Only Machines Are Buying Stocks As Humans Stay At Home"), to get a sense that virtually no carbon-based trader with an organic brain believes this rally: there is a far simpler indicator of what most investors think about the market. We are referring of course to the amount of inert cash in money-market funds which this week rose again - despite the tremendous April stock rally - hitting a record high $4.7tn, and up an unprecedented $1.1tn past 9 weeks.
For those confused by the chart above, here is the explanation: instead of risking their capital, investors have parked a record amount of cash - far more than during the financial crisis - in inert money-equivalents which yield zero as they have zero faith in any other asset class, be it bonds or stocks.
Meanwhile, those wondering what wealthy investors are doing right now, Hartnett says that BofA's private clients have reverted to equity "sellers into strength" past 3 weeks…indeed past 2 years in 49 of 69 weeks S&P500 has exceeded 2800 level private clients have been sellers.
This is taking place when, as we reported on Wednesday, the US household savings rate exploded to a massive 13%, the highest in 40 years.
To Bank of America's Michael Hartnett this means that the consumer has the "ability" to finance recovery, but the question is "willingness"; And, as Hartnett adds, watch US mortgage applications for purchase as key indicator consumer "animal spirits" returning;
As he further adds, "Wall St always undershoots and overshoots…most plausible reason overshoot continues is that US policy makers have stimulated more in 10 past weeks than Japan has in 30 years and US real estate/banking/consumer data turns out not to be Japanese."
That may explain why despite the record allocation to money market funds, we continue to see aggressive allocation to bond funds which are now explicitly backstopped by the Fed, and so in addition to the $91.5bn going into cash, $10.6bn went into bonds, $0.8bn into gold; while $6.7bn came out of equities this week.
In terms of flows to know, Hartnett points out the following:
1. investors continue to crowd into tech ($2.4bn this week - Chart 12) & healthcare funds ($1.5bn - Chart 13);
2. investors continue to flee EM assets ($13bn redemptions past two weeks);
3. HY bonds (piggy-in-middle) unambiguously seeing inflows ($2.2bn).
And explaining the ongoing flood into fixed income, BofA points out the $14 trillion in Fed of global policy stimulus which has "miraculously" prevented credit event in IG, munis, energy, mortgage servicers, EM, Italy…
... while IG has rallied back to highs - thanks to the Fed's direct backstop of the investment grade bond market - despite a massive $767bn of issuance YTD;
But the policy bazooka has yet to cause:
- US dollar to give all-clear (need DXY <98) and,
- HY outperformance of IG, without which hard to see new highs in stocks and sustained rotation large cap growth to small cap value.
Last, and most ominous, is that as Hartnett notes, the April resurrection on Wall Street has widened "inequality" (equities +$15tn vs. employment -30mn); at the same time the politicization over COVID-19 rescue policies inevitably mean Wall St expectation of bigger government, bigger taxation, bigger regulation, smaller corporate profits; This, to Hartnett, is the key reason for "25/25/25/25" cash/bonds/stocks/gold AA in 2020s.