- The heavy recent inflows to equity funds don’t match up with what Bank of America Merrill Lynch calls “lackluster” cross-asset returns.
- One Wall Street expert thinks the stock market can recover and even hit new highs in the coming months.
A quick glance at a chart of US equity performance suggests the market is rebounding nicely from the 10% correction it suffered in early February. And while it hasn’t exactly been a smooth ride, the benchmark S&P 500 is still just 4% from its all-time high.
But Bank of America Merrill Lynch says it should be doing even better, considering the mountain of cash being poured into stocks.
Equity funds absorbed a record $43.3 billion of inflows over the past week, according to data compiled by BAML. That puts the “more humble” $2.4 billion taken in by bond funds over the same period to shame.
In fact, stock inflows have been so heavy that they’re now outpacing their fixed-income counterparts for the first time since 2013 on an annualized basis, BAML data show.
In order to drive home just how little the stock market has done with these inflows, BAML highlights the $25 trillion NYSE Composite Index, which was down on a year-to-date basis through Friday. Meanwhile, emerging-market stocks are up just 5.5%, while US equities as a whole have increased just 3.4%.
And those are the two best-performing asset classes of the year — it’s all downhill from there. Government bonds have returned just 2.2%, while gold, oil, and high-yield bonds have failed to exceed 1.7%.
The “wall of money” being deployed is “at odds with lackluster cross-asset returns,” BAML chief investment strategist Michael Hartnett wrote in a client note. “Chart-topping inflows are not coinciding with headline returns.”
But Hartnett’s consternation may be fleeting, at least if the most recent outlook from Marko Kolanovic— JPMorgan‘s global head of quantitative and derivatives strategy — comes to fruition.
He argues escalating fears over a global trade war are overblown, and the negative effect it’s had on markets will be temporary. Once that psychological overhang is removed, stocks could once again re-test highs. Kolanovic also says the systematic outflows that worsened the stock correction in February will reverse in coming months, which could push equities back to record levels.
The fact that Kolanovic even has to address these issues shows the impact they’re having on stocks — and perhaps explains why they’ve had trouble matching the record-setting nature of their fund inflows.
“Our views on risks and equity upside have been confirmed by markets,” he said. “The market should reach all-time highs relatively soon.”
Leave a Reply
Leave a Reply
This site uses Akismet to reduce spam. Learn how your comment data is processed.
