Investors are getting “drawn in.”
So said JPMorgan’s Mislav Matejka on Monday.
“Drawn in” has a negative connotation. It’s just “sheep to the slaughter” without the bloodletting. “Drawn in” then drawn and quartered.
I want to say no one trusts the rally in 2023, but it’s impossible to make those kinds of unequivocal statements. Someone, somewhere clearly trusts it, because money’s being thrown at it.
Of course, that’s an exercise in question-begging in this context: The fact that so much of the price action recently looked like under-positioned funds chasing the market is actually evidence of career risk, not trust in any fundamentals — mirco, macro or otherwise.
“While sentiment and positioning indicators were very downbeat six months ago, this is changing,” Matejka went on to say, citing stretched momentum indicators and a rebound in hedge fund betas, among other factors, in assessing that investors are “comfortable chasing the market.”
Do note: It’s not just equities. The EPFR data continues to suggest a readiness to buy pretty much anything. “It’s happening again — the grab for assets and (slowly) out of cash continue[d] per EPFR data for the second week in a row,” Nomura’s Charlie McElligott said. Here’s a rundown from Charlie of last week’s flows, along with four-week totals for the relevant assets and the percentile rankings:
INFLOWS—Global Equities +$16.0bn (94%tile, +44.7bn for the last 4w, 93%tile, 4w in a row), Global Bonds +$7.8bn (85%tile, +51.8bn for the last 4w, 96%tile, 5w in a row), Global IG +$7.2bn (93%tile, +31.0bn for the last 4w, 95%tile, 6w in a row), High Yield +$659.0mm (86%tile, +3.9bn for the last 4w, 92%tile)
While there’s some truth to the idea that investors are still comfortable in cash given the highest yields in years, global money market funds did lose $300 million last week.
Matejka said Monday that Q1 “is still likely to be a high water mark” for stocks.
“The Fed is likely to start a pause as Q1 ends, but we do not see a pivot,” he said. “Profit margins are at record, currently much higher than pre-COVID, pricing power is likely to deteriorate from here [and] Q1 results are coming out mixed to date, with [a] sharply reduced proportion of beats, and the typical upward revisions that one sees as we move through reporting seasons so far missing.”
Importantly: It looked on Monday like markets were newly receptive to the Fed’s “higher for longer” narrative. Terminal rate pricing perked up, the dollar rose and so on.
The concern (don’t skip over this), is that the market will wake up to the idea that the Fed means what it says just as profit growth decelerates in earnest. That’d be conducive to a lower multiple on falling EPS forecasts.
