Nov 11, 2019

Wall Street loves a party

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.

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Traders keep selling stocks and stuffing cash into savings accounts

Data: Investment Company Institute; Chart: Andrew Witherspoon/Axios

The return of bullish sentiment that has driven the stock market to fresh all-time highs hasn't dented the safe-haven appeal of money market funds, which are akin to savings accounts or holding cash.

Why it matters: In fact, data shows investors are still selling equities on an overall basis and moving that money into money market funds.

Go deeperArrowDec 6, 2019

A record amount of money has been pulled out of stocks in 2019

Data: ICI; Chart: Axios Visuals

Traders still don't trust the stock market's run and are moving money out of equities at a historic level, despite a 25% year-to-date gain for the S&P 500.

What's happening: Data from the Investment Company Institute shows money has been pulled out of equity mutual funds and ETFs in every month this year except January.

Go deeperArrowDec 9, 2019

The market will need the Fed again in 2020

Illustration: Aïda Amer/Axios

The No.1 risk to the stock market continuing its outperformance next year is not President Trump or consistently weak U.S. economic data or even China, senior analysts at John Hancock Investment Management say, but whether or not the Fed continues to stimulate the economy through what they call "not QE."

What it means: Fed chair Jerome Powell has insisted the central bank's bond buying program — initiated after rates in the systemically important repo market spiked to five times their normal level in September — is not quantitative easing.