Investors pile into stock market as ‘bull capitulation begins’: BAML
The stock market’s gangbusters start to 2018 is fueling bullish sentiment, a fact underlined by fund-flow data, according to analysts at Bank of America Merrill Lynch.
Investors poured $24.4 billion into equities, $13.1 billion into corporate and emerging market bonds, sending U.S. equities to fresh records.
Equity inflows were sixth largest on record, while flows into bonds were the largest in 31 weeks.
Investors continued to favor high-grade bonds, pouring $8.1 billion for the 55th straight week. The $3.6 billion inflow into emerging market debt was the second largest on records.
The S&P 500 SPX, +0.67% is up 4.2% since the start of the year, ending at a record 2,786.24 on Friday. The Dow industrials DJIA, +0.89% finished at a record 25,803.19, leaving it 4.4% higher since the calendar rolled over to 2018.
“The bull capitulation begins,” wrote BAML analysts, referring to bullish appetite for risky assets such as equities, emerging markets and high-yield bonds.
Flows into EM debt, investment grade and high-yield bonds over the past week were the second largest ever, according to BAML. The six-week inflows into energy funds were the largest in three years, as rising oil prices attracted investors, who continued to chase returns.
For all the talk of potential inflation on the back of tax cuts and tightening labor market, markets are portraying a completely different picture, however. In a chart below, BAML analysts point out how deflation-oriented assets outperformed inflation assets beginning mid-1980s, with the gap as wide as it’s ever been.
Inflation assets include commodities, inflation-linked Treasurys, European and Far East equities, U.S. banks, value stocks and cash. Deflation assets include government bonds, U.S. investment grade corporate bonds, the S&P 500, U.S. consumer discretionary, growth stocks and U.S. high-yield bonds.
“Investors are unambiguously long [equities],” concluded BAML analysts, citing inflows to active equity funds and new lows allocations in private client debt at 22.5% and cash at 10.2%.
“Investors will stay unambiguously long until rates go up and/or earnings per share go down,” BAML said. The threat to earnings would come from trade tensions, while wage inflation and rising yields would throw a wrench into the bonds versus stocks dynamic.
Since the start of the year, 10-year yield TMUBMUSD10Y, +0.41% rose 15 basis points to 2.55%, but until and unless yields rise over 3%, “greed in credit and equities will continue to trump fear,” according to BAML.
The earnings season unofficially kicked off with several large banks reporting ahead of the bell on Friday. Wall Street analysts estimate earnings per share grew about 10% in the final quarter of the 2017.
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