With so few investors buying America’s $5 trillion post-Christmas stock rally, Wall Street is starting to wonder whether apathy could kill the melt-up.
The question grew more urgent this week after a usually reliable catalyst for equity gains -- optimism over the outlook for trade -- failed to spur the S&P 500 Index higher on Monday.
This year’s gap between equity performance and fund flows is now near the widest since the financial crisis, according to Goldman Sachs Group Inc. strategists. Despite stellar gains across almost all asset classes, the proportion of cash going into safe versus risky securities is about the highest since 2009, they wrote in a recent note.
For Citigroup Inc., the lack of conviction is enough to cast doubt on the sustainability of a surge that’s seen the S&P 500 gain almost 19 percent since Christmas. The evident caution “doesn’t bode well for continued equity market strength like we’ve seen,’’ analysts led by Chris Montagu wrote this week.
U.S. stocks have been struggling to push past the mini peaks registered in October and November, and the S&P 500 has failed to hold above the 2,800 level so far in 2019. A sputtering global economy and slowing earnings growth are among the factors keeping investors away.
Glimmers of Hope
Yet there are early signs of a turnaround in sentiment. Investors have recently been adding to bets on equities, with U.S. stock funds seeing the biggest inflows since late September in the week ended Feb. 27, according to Bank of America research citing EPFR data.
Meanwhile, various breeds of systematic traders such as trend-following CTAs and risk-parity strategies are in the process of ramping up their equity exposures, according to Deutsche Bank AG. The lender also expects higher bond yields to prompt a rotation away from fixed income and back into stocks. The yield on 10-year Treasuries has climbed by about 10 basis points in the past two weeks to 2.74 percent.
Rising yields have historically “been a good leading indicator of slowing inflows into bond funds or even outflows, with equities typically benefiting,’’ strategists led by Binky Chadha wrote in a March 1 note.
‘Sell the Rally’
For now though, the equity advances worldwide are clearly looking stretched despite the fact that “no one appears to have participated in the rally,” according to strategists at Barclays Plc.
Unlike the early-2018 gains, which were supported by strong inflows, they argue the bulk of this advance was probably spurred by short covering. Barclays clients are in “sell the rally” mode, strategists including Emmanuel Cau wrote last week.
“Fundamental investors need to see good news again before adding back to equities,” they said.
— With assistance by Ksenia Galouchko