Jul 13, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🎙 “The most important thing is to live a fabulous life. As long as it’s fabulous I don’t care how long it is.” - See who said it and why it matters at the bottom.

1 big thing: Fund managers start to board the stock bandwagon

Illustration: Aïda Amer/Axios

Asset managers at major U.S. investment firms are starting to get bullish with their clients, encouraging stock buying and trying not to get left behind right as the metrics on tech stocks rise back to highs not seen since the dot-com crash of 2000.

What's happening: Appetite for stocks is starting to return, but slowly as institutional money managers were overwhelmingly sitting on the sidelines in cash during April and May.

  • And money has flowed much more significantly to bonds than stocks over the past two months.

By the numbers: U.S. stock funds overall have seen net outflows in nine of the past 10 weeks, including $22.9 billion of outflows for the week ended July 1, the last week for which data are available, according to the Investment Company Institute.

  • Bond funds, on the other hand, have seen inflows during each of those 10 weeks and generated $114.4 billion of inflows in just the last five.
  • For comparison, bond funds saw around $180 billion of total inflows for all of 2018.

Yes, but: The pendulum is swinging.

  • Last week, net long U.S. equity futures positioning rose for a third straight week to a three-month high, according to data from Deutsche Bank, which also noted that the call-to-put ratio — the percentage of bullish versus bearish bets on stock options — surged to the 94th percentile.
  • Deutsche's data also show inflows of $6.2 billion into equity funds last week, the first inflows in four weeks.
  • Bank of America's wealthy clients moved the most money into equities last week since November 2019.

Between the lines: While stocks overall have seen net outflows, tech sector funds have notched 13 straight weeks of positive fund flows, banking their largest quarter of inflows since the first quarter of 2000, according to data from Lipper Refinitiv.

What we're hearing: Markets are rationally being irrational, strategists at Bank of America said in a note to clients late last week, as "government and corporate bonds have been fixed ('nationalized') by central banks, so why would anyone expect markets to connect with macro, why should credit & stocks price rationally."

  • "2020 policy stimulus has been massive," they add, totaling $18.5 trillion — $10.5 trillion from government spending and $8 trillion from central banks, or 21% of the world's total GDP so far this year.
  • And it has been coordinated, with "monetary & fiscal, like two wheels of a bicycle, moving quickly in same direction working together."
Bonus chart: Nasdaq optimism hits dangerous levels
Expand chart

Data: SentimenTrader; Chart: Axios Visuals

An index measuring optimism in the Nasdaq 100 rose on Friday to its highest level since just before the dot-com bubble burst.

What's happening: The three-month average of SentimenTrader's Nasdaq Optimism Index is at the highest level since 2000 and its 30-day average is at one of the highest levels ever.

  • Further, the number of media stories mentioning the word "bubble" has risen to the highest level since April 2000, SentimenTrader's data shows.

What it means: The Optimism Index (Optix) for ETFs is based on...

  • Trading activity in put options versus call options.
  • Future volatility expectations.
  • Average discount of the fund to its net asset value.
  • Price behavior.

How it works: "Each measure is ranked against its historical norms to determine whether or not the current level is at an extreme, then totaled to come up with an overall score," the company's Troy Bombardia tells Axios in an email.

  • "The Optix can go from 0 (maximum pessimism) to 100 (maximum optimism)."

What they're saying: "The similarities between today and the dot-com bubble are stacking up," Bombardia said on Twitter.

  • "History tells us that this is a dangerous time to be full-bore bullish. Such extreme sentiment often led to large pullbacks & corrections. Monitor this risk closely in the weeks ahead."

But, but, but: "Unlike almost every other sector, the tech sector has actually benefitted from COVID-19 as it has increased the role that technology plays in the lives of many people," Pat Keon, senior research analyst at Lipper Refinitiv, said in a note.

  • "The coronavirus has forced large swaths of corporate America to work remotely and pushed shopping habits even more online and further away from brick-and-mortar stores."
  • "These changes have further emphasized the importance of technology in the day-to-day routines in the modern world."
2. Catch up quick

The median change in rankings of the world's 1,000 largest companies in June versus six months ago was the largest since December 2008 with tech and health care gaining ground. (Nikkei)

U.S. daily coronavirus infections surpassed 60,000 for a third straight day on Saturday after reaching a record of more than 66,000 the previous day. (WSJ)

New Chinese bank loans totaled a record 12.1 trillion yuan in the first half of the year, beating the previous peak of 9.67 trillion yuan in the first half of 2019. Chinese central bank governor Yi Gang said last month new loans could reach nearly 20 trillion yuan for the full year. (Reuters)

3. The myth of closing the wealth gap with individual accomplishment

Data: Federal Reserve; Chart: Axios Visuals

The increasing number of Black millionaires and billionaires and the success of people like former President Obama have led many to speculate that the racial wealth gap in the U.S. is closing, but in fact the opposite is happening.

  • Data show that over the last 30 years, even as individual Black Americans have seen increased success, the overall wealth gap has widened.

What's happening: As of 2016, 15% of white families were millionaires, according to the latest data from the Fed, compared to 7% in the Fed's 1992 Survey of Consumer Finances.

  • The percentage of Black households worth more than $1 million rose from about 1% in 1992 to a little less than 2% in 2016.

Between the lines: The widening wealth gap has happened despite the fact that Black Americans increased their holdings of financial assets to 96.7% in 2016 from 63.5% in 1989.

  • Fed data show white Americans get more help accumulating wealth — 26% of white families reported receiving an inheritance, compared with 8% of Black families and 5% of Hispanics.

Education also makes much less difference than being white as Black Americans with Master’s degrees have about a 7% chance of becoming a millionaire compared to a 37% chance for white Americans, St. Louis Fed data show.

  • White Americans with a high school education have about the same likelihood of becoming a millionaire as Black Americans with a Master's degree.

The bottom line: “It’s a false narrative to say race doesn’t matter in the United States,” William Emmons, a senior economic adviser at the St. Louis Fed, told Bloomberg in 2016. “It demonstrably does in the results we keep coming upon.”

4. The peril of $40-per-barrel oil

Data: Federal Reserve Bank of Kansas City; Chart: Axios Visuals

Axios' Ben Geman writes: Oil patch bankruptcies are piling up and prices are still in the financial danger zone for a significant amount of producers despite some recovery, new reports show.

Driving the news: A Kansas City Fed survey of companies in their region, released Friday, finds...

  • "Over two-thirds of firms reported they could survive more than a year if current revenues were to continue, while around 32% would not survive a year if current revenue levels persist."
  • "A majority of firms in our survey applied for and received SBA PPP loans, but low energy prices have hurt profitability."

Why it matters: The finding from the bank — whose region includes the producing states of Oklahoma, Wyoming and Colorado — underscores the sector's peril.

  • The Kansas City Fed report came on the heels of the latest tally of industry insolvencies from the law firm Haynes and Boone.
  • They found that 18 producers filed for bankruptcy in the second quarter, up from five the prior quarter and the most since Q2 of 2016, when companies were reeling from the last bust.

What's next: More Chapter 11 filings. Prices for WTI, the U.S. benchmark, have been hanging around the $40-per-barrel range for the last month, far higher than the depths of April's collapse but ... they are still a problem.

  • It's "not a sufficient clearing price for many heavily leveraged shale producers," Haynes and Boone note in the report.
  • "It is reasonable to expect that a substantial number of producers will continue to seek protection from creditors in bankruptcy even if oil prices recover over the next few months."
Dion Rabouin

Editor’s note: Story 3 was corrected to show 26% of white families received an inheritance (not 25%).

Thanks for reading!

Quote: “The most important thing is to live a fabulous life. As long as it’s fabulous, I don’t care how long it is.”

Why it matters: On July 13, 1985, Queen and legendary lead singer Freddie Mercury (born Farrokh Bulsara) gave one of the great musical performances of all time at Live Aid in Wembley Stadium.

  • Watch the performance in full here.