“Since June, investors started withdrawing their cash from government money funds consistent with the idea that some of the previously accumulated liquidity due to risk reduction has started being deployed into non-cash assets such as bonds and equities”, JPMorgan’s Nikolaos Panigirtzoglou writes, in the latest edition of the bank’s popular Flows & Liquidity series.
I touched on this Monday, in the context of the ubiquitous “sideline cash” argument for why it still makes sense to harbor a constructive outlook on equities after the best quarter for global stocks since 2009.
Specifically, I talked a bit about cash in money market funds, which remains near a record high despite recent outflows. That’s a potential source of funds, and the breakdown of recent flows is telling. After a cumulative inflow of some $1.2 trillion from mid-February through mid-May, government funds have seen outflows for six consecutive weeks.
Between that source of funds and a public apparently flush with savings and liquid cash thanks to transfer payments, there’s scope for re-risking in credit and equities, or, at the least, for spending into the reopened economy (see: “You Gotta Buy Any Dip: FOMO Calls Are Back, But Not Everyone Is Excited“).
One look at the juxtaposition of equity and bond flows is all you need to come to the conclusion that to the extent some of the sideline cash is being deployed in the market, it’s going to fixed income, not stocks.
If you ask JPMorgan, “the picture in Figure 3 underestimates the buying of individual equities outside equity funds”.
Why? Well, in the simplest possible terms, it’s a generational thing.
“The older cohorts of the US retail investors’ universe tend to invest in equities via equity funds [while] the newer cohorts including millennials prefer to invest directly in individual equities”, Panigirtzoglou goes on to say, adding that “the weaker flow picture in equity funds suggests older generations of US retail investors have been so far more cautious on equities than the new generation as they have preferred to deploy their excess liquidity to bond funds to perhaps take advantage of the value that still exists in credit”.
Or, perhaps the “older generations” of retail investors were looking to front-run the Fed, which telegraphed its intention to buy corporate bonds back in March. It’s less likely that younger retail investors understood that dynamic, which means they’d be more inclined to simply try their hand at buying the dip in individual stocks, as opposed to, say, piling into credit funds in anticipation of Jerome Powell’s entrance.
Panigirtzoglou continues, noting that “millennials have been more bullish on equities, preferring to deploy their excess liquidity into individual equities via retail brokers such as Robinhood rather than via equity funds”.
“We note that Robinhood has attracted disproportionally high publicity in recent months given its very low share in terms of total client assets relative to other US retail brokers”, JPMorgan goes on to say.
Ultimately, JPMorgan thinks it’s just a matter of time before the older generation of retail investors starts believing in the rally, thereby reversing the trend in fund flows which has favored fixed income as money comes out of government money market funds.
Taking into consideration fund flows and stock buying as gleaned from NYSE margin accounts, the bank says retail investor flows have probably been around $150 billion since April, which would mean just under half of the $310 billion in selling witnessed during February and March has been reversed.
“Going forward we believe that the equity buying by retail investors will likely strengthen as the older cohorts which have so far preferred to extract any remaining value in credit via buying corporate bond funds, will switch later in the year into equity funds once credit spreads normalize and value gets exhausted in credit”, Panigirtzoglou says.
For what it’s worth, Morgan Stanley isn’t buying the retail euphoria argument either, but like JPMorgan, the bank does see scope for retail money to be funneled back into the market later this year.
“We don’t think retail money has been driving the rally but see potential for this as the recovery path becomes clearer”, the bank’s Mike Wilson wrote Monday. “There has been a lot written and said about speculation from retail investors on certain online trading platforms [but] we don’t see that in our wealth management business which is more in line with the $38 billion in net outflows from US equity markets year to date”, he adds.
In fact, Wilson calls bearishness from retail investors “unprecedented and truly an outlier”.
In explaining this, Morgan cites the “nature of this recession”, revolving as it does around the worst public health crisis in a century.
“Most of the financial wealth is held by those over 60 years old and COVID-19 is much more deadly for that cohort than the general population”, Wilson writes. “Furthermore, this is an election year that is likely to be quite contentious and that is making individuals nervous and uncertain about the future”.
Hopefully, there will be some resolution on both the health and the political front in Q4. But given fears of a second COVID wave colliding with the “normal” flu, and considering worries in some corners that, if the election is close, a certain litigious individual might not willingly abdicate the “throne”, there are no guarantees.