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Illustration: Sarah Grillo/Axios

Investors put their recession umbrellas back in the closet last week and broke out their party hats, as all three major U.S. stock indexes hit fresh record highs. The market is bullish on the expected pause in President Trump's trade war with China and market participants have plenty of ammo to drive stocks higher.

What's happening: Investors are moving back into risky assets like stocks in a big way and selling out of traditionally safe ones.

  • Last week global and European equity funds saw their largest inflows since December 2018, data from Deutsche Bank shows, while investors also moved strongly into long positions in oil, emerging market and high-beta currencies, and high-yield bonds.
  • U.S. investors also were bullish on U.S. equities, with stock inflows rising to their highest total since September, data from Bank of America Merrill Lynch shows.

Background: Prior to November, market participants had shunned stocks, preferring to sock money away in safe-haven investment grade and municipal bonds (on pace for their largest inflows ever) and money market funds, effectively savings accounts, which have attracted the most funds since 2009.

  • Analysis from Deutsche Bank shows outflows from equity funds and ETFs since December hit a record $330 billion, cumulatively.

Why it matters: The stock market's gains this year — up 23% year to date — have largely been driven by low volume and company share buybacks, rather than old-fashioned stock buying.

The big picture: “You could be contrarian and say [the money market flow is] positive, because if the market actually steadies itself and there’s a detente [in the trade war], that money’s going to go back into the equity market,” Quincy Krosby, chief market strategist at Prudential Financial, told CNBC last month.

Yes, but: Overall, the economy remains in much the same shape it was when investors were selling risk and buying safety.

  • The trade war, even with a "phase one" deal, has not been resolved and tariffs remain in place.
  • The U.S. and global manufacturing industries remain in recession.
  • Leading indicators, including housing and transportation, are still struggling.
  • With 89% of companies reporting, U.S. company earnings are on pace to post a 2.4% decline in Q3, according to FactSet.
  • U.S. jobs growth is slowing and companies are cutting back on investment.

The stock market may not have economic fundamentals on its side yet, but it has the Fed and a growing number of companies ready to buy back shares of their own stock.

  • The Fed has cut U.S. interest rates to a range of 1.50% to 1.75% and is buying $60 billion worth of Treasury bills a month to pump cash into the market.
  • That will provide a major boost of liquidity, similar to the central bank's quantitative easing program that helped stocks rebound from the financial crisis in 2009.
  • Year to date, cumulative buybacks are up 25% year over year, analysts at Bank of America Merrill Lynch note, and buybacks in Q3 increased 28%.

The bottom line: The potential for a trade war detente has gotten investors bullish, but the fundamentals have not caught up yet.

Go deeper: JP Morgan's Dimon calls wealth gap a huge problem but defends CEO pay

Go deeper

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Over 3,000 detained in protests across Russia demanding Navalny's release

Russian police officers beat protestesters at a rally against of jailing of oppositon leader Alexei Navalny in Moscow on Saturday. Photo: Mikhail Svetlov/Getty Images

Police in Russia on Saturday arrested more than 3,300 people as protesters nationwide demanded that opposition leader Alexey Navalny be released from jail.

Details: Demonstrations began in the eastern regions of Russia and spread west to more than 60 cities.

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Arizona Republicans censure Cindy McCain and GOP governor

Combination images of Cindy McCain and Gov. Doug Ducey. Photo: FilmMagic/FilmMagic for U.S.VETS/Michael Brochstein/SOPA Images/LightRocket via Getty Images

Arizona Republican Party members voted on Saturday to censure prominent GOP figures Cindy McCain, Gov. Doug Ducey and former Sen. Jeff Flake (R-Ariz.), who've all faced clashes with former President Trump.

Why it matters: Although the resolution is symbolic, this move plus the re-election of the Trump-endorsed Kelli Ward as state GOP chair shows the strong hold the former president has on the party in Arizona, despite President Biden winning the state in the 2020 election.

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Illustration: Eniola Odetunde/Axios

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  2. Education: Schools face an uphill battle to reopen during the pandemic.
  3. Vaccine: Florida requiring proof of residency to get vaccine — CDC extends interval between vaccine doses for exceptional cases.
  4. World: Hong Kong puts tens of thousands on lockdown as cases surge — Pfizer to supply 40 million vaccine doses to lower-income countries — Brazil begins distributing AstraZeneca vaccine.
  5. Sports: 2021 Tokyo Olympics hang in the balance.
  6. 🎧 Podcast: Carbon Health's CEO on unsticking the vaccine bottleneck.