Where’s the demand supposed to come from?
From a stylized perspective, stocks are subject to the same “laws” of supply and demand as any other good, service or commodity. When demand outstrips supply, prices are higher and vice versa.
Forecasting equity demand isn’t straightforward, though. You have to make a lot of assumptions about household and corporate behavior, which in turn depend on forecasts about the economy and so on. Projecting net demand entails making more assumptions about corporate behavior (i.e., issuance), which means even more macro forecasting.
If you’re only interested in domestic equities, you have to make some projections about currencies and rates to get to an estimate of foreign demand, and then there’s pension funds, and on and on. Suffice to say it’s forecasting on top of forecasting, and therefore precision is challenging.
Currently, systematic cohorts are “out of ammo” when it comes to adding equity exposure. Systematic buying is like swing demand, contingent on volatility. Volatility has been very low, so systematic buying was robust, but now we might’ve reached the limit.
According to Goldman’s Scott Rubner, there’s now a downside asymmetry. In an “up big” tape over the next month, systematics would be buyers of just $25.2 billion, while in a “down big” tape, there’d be $276.3 billion to sell.
So, who’s going to step in to fill any void? Under-positioned discretionary investors, perhaps. After all, they’re sitting on a lot of dry powder (i.e., high-yielding USD cash) and are apparently starting to add risk, even as anecdotes suggest fund managers are the most Overweight bonds since 2009 both in absolute terms and relative to equities (while specs pushed their net short in the 10-year to a new extreme as of the last CFTC update).
“With recent inflation and claims data now perceived as corroborating the Fed’s shift into ‘the end of tightening,’ equities clients have been forced back into market participation, taking up net- and gross- exposure meaningfully [and] deploying from large cash positions, as per Street-wide PB data,” Nomura’s Charlie McElligott said.
Of course, discretionary demand hinges in part on whether the Fed gets the cover it needs from the incoming data to at least nod in the direction of a pause. Policymakers have just enough cover now, but as we learned in February (with January’s data releases), we’re always just a few hot, top-tier domestic macro prints away from a hawkish pivot. That’s surely keeping some “smart” money on its toes.
As for the corporate bid, that’s an open question. Borrowing to fund buybacks isn’t attractive when the cost of debt is higher, and cash balances dropped sharply last year as management leaned on large cash piles amid rising rates.
Companies will be coming out of earnings buyback blackouts soon. Goldman’s corporate trading desk has seen executions drop 40% this year, even as authorizations are on track for their second best year ever.
Whether or not companies pull the trigger or hold off could be key, given that buybacks can serve as a kind of real-life plunge protection. “We were expecting buy demand to offset some potential supply [but] now I am less certain as corporates fortify their balance sheets, and talk about less repurchases on their earnings calls,” Goldman’s Rubner remarked.
I suppose there’s always the retail bid. “Individual investors scooped up shares of single stocks and exchange-traded funds at a near-record clip in the first quarter,” the Wall Street Journal noted last week, citing Vanda Research. Individuals purchased a net $77.7 billion in equities and ETFs on US exchanges in January, February and March, just barely behind Q1 2021 and Q1 2022.
