Illustration: Sarah Grillo/Axios

Even after the pullback to end last week, U.S. stock prices are booming and fund managers have largely hitched their wagons to the idea that prices will continue rising for the foreseeable future. But many are hedging their bets, showing bullishness in words much more than in deeds.

What's happening: The vast majority of assets — including currencies, bond prices, commodities and equities — have risen notably in price since the start of the third quarter. It’s a "buy anything" market.

  • Still, data from the Investment Company Institute show equity funds have seen net outflows every week for at least the past 10 and for every month of the year, including $62.1 billion of outflows in July.
  • Bond funds, conversely, have seen net inflows each of the last 10 weeks and in every month since April, including $98.5 billion in July.
  • Money market funds remain near $4.5 trillion in holdings, close to record highs.

Between the lines: Investors are buying call options at historic rates, which give them the right but not the obligation to purchase stocks at a certain price. That means they benefit if prices continue to rise but can avoid losses if they fall.

  • Citigroup’s panic/euphoria model — tracking metrics such as options trading, short selling and client note bullishness, instead of stock buying — has reached almost three times the level denoting euphoria and shows the longest run of extreme bullishness since the early 2000s.

Reality check: The U.S. stock market continues to outperform the rest of the world by a wide margin despite the fact that the U.S. has done the worst of all developed economies in handling the virus, in terms of deaths, infections and the ongoing infection rate.

  • While improving, the economy remains depressed, with GDP expected to remain below 2019 levels until at least 2022.
  • Close to 30 million people remain on unemployment insurance.
  • Worse, a fundamental recession is developing within the downturn caused by COVID-19, economists say.

Be smart: U.S. stocks are defying fundamentals too. Earnings on the benchmark S&P 500 outperformed expectations by a record amount in the second quarter, but were still the worst since Q1 2009, down by 32% year over year, and are expected to fall 22% in the third quarter.

Don't sleep: The law requires asset managers to stand behind any public endorsements they have made and many firms can take months to make trades recommended by asset managers.

  • That means more money could flow into stocks soon, but also could mean many of the public stances asset managers have taken are months old — a relative eternity in the era of COVID-19, and based on now-outdated information.

Go deeper

Dion Rabouin, author of Markets
Sep 15, 2020 - Economy & Business

Nikola and the battle for the soul of the stock market

Data: FactSet; Chart: Axios Visuals

The fate of one of Wall Street's most polarizing stocks — embattled electric truck maker Nikola, the company accused of being an “intricate fraud built on dozens of lies” and now facing a reported SEC investigation — will be decided almost entirely by long-only investors and mostly by retail traders.

Why it matters: This could be the ultimate test of Wall Street's current buy-the-dip ethos and the option market mania that has driven equity prices and valuations through the roof despite a withering economy.

Dion Rabouin, author of Markets
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Why new coronavirus stimulus talks are at a "dead end"

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Senate Republicans last week tried and failed to pass a slimmed down stimulus bill that would have included new money for small businesses, schools and $300 in additional weekly unemployment benefits.

Driving the news: Negotiations are now at "a dead-end street,” Kansas Sen. Pat Roberts said following the bill's failure, and Florida Sen. Marco Rubio said plainly, "Congress is not going to pass another COVID relief bill before the election." In fact, we're about two weeks away from a potential government shutdown.

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With President Trump planning to nominate his third Supreme Court justice nominee this week, key Republican senators are indicating their stance on replacing the late Justice Ruth Bader Ginsburg with less than 50 days until Election Day.

The state of play: Senate Majority Leader Mitch McConnell (Ky.) has vowed that "Trump’s nominee will receive a vote on the floor of the United States Senate." Two GOP senators — Sen. Lisa Murkowski (R-Alaska) and Sen. Susan Collins (R-Maine) — have said they oppose holding a vote before the election, meaning that two more defections would force McConnell to delay until at least the lame-duck session of Congress.