Show me the money

You can count us among the world’s cinephiles, with a particular and deep appreciation for the cinematic work of the late, great Burt Reynolds. When it comes to remarkable movies, they all seem to have a few things going for them, including a first-rate cast, compelling characters, an engaging narrative, and of  course a memorable tag line. Think “To infinity, and beyond” (Toy Story); “I’ll be back” (The Terminator); and “Show me the money” (Jerry McGuire), which brings us to the subject of this Weekly Wire – the money that has – or has not – gone into US equities these past few years, and what it might mean for the  durability of this new bull market.

At a high level, Americans have been net buyers of bonds and net sellers of stocks since January 2018, with approximately $659 billion going into fixed income facing mutual funds and ETFs, and $316 billion coming out of equity facing mutual funds and ETFs (excluding share buybacks), with much of that capital  exiting stocks in 2020. We are sure many of those trades were driven by any number of financial planning factors, including age and approaching retirement. Yet, we are also sure many of those trades were driven by skepticism over the outlook for the US economy and stock market—an understandable point of view considering the impact of COVID-19 on both.

Let’s set aside what -- we hope and expect -- is a once in a century pandemic as a catalyst for a bear market, and focus on what has historically happened at – or caused – a stock market top. The economy is running flat out, inflation and interest rates are moving up, valuation is becoming quite stretched, and investors have fully embraced equities as an asset class. This means there is no one left to buy, but  plenty of folks in a position to sell. Today, the economy is only just getting back on its feet; inflation and interest rates are low; valuation for the S&P 500 Index is elevated, but much of that is driven by companies carrying P/E multiples, justified by disruptive business models, and investors have, on  balanced, shunned equities. Odds are this young bull market will be showing investors the money for years to come.

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Tagged: weekly wire, market perspectives, Tim Holland, COVID-19, S&P 500 Index, US equities, US economy, bull market