It probably wasn’t a “forecast.”
On Friday, a couple of media outlets jumped at the opportunity to run a headline about equity inflows more than quintupling their previous annual record in 2021.
The figure ($1.6 trillion) came from BofA’s Michael Hartnett, whose notes you have to learn to read. His digital pen produces words, yes, but it also produces equations, mild hyperbole, colorful superlatives and extrapolation.
Note that none of that is meant as criticism. Hartnett’s work is superbly engaging and there have been several occasions over the years when he’s been almost uncannily prescient. But when he wrote, in his latest, that “the inflow to stocks [is] annualizing a breathtaking $1.6 trillion,” the point was to emphasize the pace and provide context for another blockbuster week of inflows.
The latest weekly data from EPFR showed a “staggering” (there’s a superlative) $68.3 billion inflow for equities, Hartnett observed, noting that the YTD total for 2021 is $347 billion.
Those are indeed some impressive totals, and who knows, maybe BofA does think they’re sustainable for the entire year. But judging by the tongue-in-cheek header on the chart (“come get em’ while they’re still hot”), the point was probably just to illustrate how voracious investors’ appetite for equities has been recently, and one way to do that is by annualizing flows.
In any event, the breakdown showed $53 billion flowing into US equity funds. That takes the net inflow (i.e., across mutual funds and ETFs) to almost $138 billion in 2021.
If you ask Hartnett, Thursday’s plunge in crude (figure below) may have been “the first sign of [a] potential regime shift to higher yields/lower growth.” There’s not a lot that benefits from sudden, unruly US rate rise, and Hartnett said the “immediate risk” is that a “disorderly yield jump hurts cyclicals.” He emphasized (again) that staples may be a good defensive hedge in the short-term.
In the medium-term, his outlook is familiar. He often speaks of “the 3 Ps,” which are “peak positioning, profits and policy” in the first half of this year, followed by the “3 Rs” of “rising rates, regulation, and redistribution” in the back half of 2021. For that, you may want to “own volatility,” he said.
By now, I think it’s safe to say that most analysts and market participants have arrived at similar conclusions when it comes to the longer-term outlook. While not everyone is prepared to say that the low is in for bond yields or that the four-decade bond bull is officially dead, most agree that fiscal-monetary coordination and a shift towards demand-side stimulus and more redistributive policies, at least has the potential to change the game.
If that’s the case, it’s bearish (on a relative performance basis anyway) for secular growth shares and other perennial winners from the long-running “slow-flation” macro regime. For example, Hartnett suggested this week that we may have seen the peak for tech and FAANG as a share of global equity market cap (figure below).
“2020 marked the secular low point for inflation and interest rates,” he said, in the same note, adding that the “asset allocation implications are bullish real assets, commodities, volatility, small caps, value and EAFE/EM stocks.”
It’s worth noting (and it’s all too easy to forget this), that a non-negligible percentage of Wall Street has never seen a macro environment that didn’t favor large-cap growth shares, tech and bonds. An even larger percentage has never traded in an environment where the negative stock-bond correlation that underpins a classic 60/40 portfolio doesn’t hold. And even fewer were around when inflation was “a thing.”
