It never ends.
Investors poured another $25.6 billion into equity funds over the latest reporting period, bringing the five-month haul to more than $600 billion and the YTD total to nearly $413 billion (figure below).
Last week, the realization that global stock funds had taken in more in five months than they did in the previous dozen years grabbed a few headlines. As the MSCI All-Country World Index logged a fourth consecutive weekly advance, the flows continued unabated.
Bonds funds, meanwhile, have taken in “just” $165.6 billion in 2021 thus far.
Inflows to US equity funds (specifically) have been a semblance of moderate lately and with US stocks having eclipsed Wall Street’s year-end forecasts (updated figure below), there are some concerns that this may be as good as it gets — that it’s all “in the price,” so to speak.
“Although we are keen to maintain our reasonably aggressive stance on risk assets, the speed of price developments will probably make it very difficult for the rally to last another entire year,” SocGen said, in a new multi-asset strategy piece.
The quandary for market participants is simply this: Assets tend to price in expected future outcomes. So, as the good news “realizes,” the reaction could be muted, or even counterintuitive, as we’ve seen in bonds. And yet, for equity investors, it may be difficult to totally ignore an increasingly favorable backdrop, especially if ongoing improvements are seen as helping to justify elevated multiples.
“Corporate earnings and balance sheets will almost certainly continue to improve, thanks to a combination of ultra-loose global policy mix, state intervention when needed and vaccination successes allowing economies to reopen,” the same SocGen piece said.
Remember: A stock crash isn’t the only way for valuations to “normalize.” Earnings could catch up, although focus is now shifting to the read-through of macro and policy for profits. “Our investor conversations remain focused on the impact rising input costs and inflation will have on company margins,” Goldman’s David Kostin wrote Friday afternoon. “As the US moves beyond key macro events… we expect three defining themes for markets will be tax reform, infrastructure, and pricing power,” he added.
Hopefully, management teams will provide something in the way of useful clarity during earnings season. Almost two-thirds of S&P 500 market cap will report over the next two weeks. The Z-score for S&P 500 EV/sales, EV/EBITDA, Price/Book, FCF yield, and P/E are 3.2, 3, 3.1, 1.9 and 2.2, respectively, on a 10-year lookback.
Oh, and for whatever this is worth, $47.3 billion in cash came off the proverbial sidelines in the latest weekly reporting period. That was the most in four months. ICI’s data showed a $30 billion outflow from money market funds (figure below).
That was the biggest since December. With $4.45 trillion still sitting mostly idle, there’s plenty of ostensible “dry powder” left over from last year’s build.
The bullish narrative for stocks typically relies in part on the notion that some of that will invariably be “deployed.”
