SPY - $5.28 Trillion Reasons To Be Bullish

2023-04-28 11:15:08 ET

Summary

• Fund managers are more overweight bonds than at any time since the Great Financial Crisis.
• Fund managers are more underweight stocks than at any time since the Great Financial Crisis.
• Investors have piled into money market funds offering safety, liquidity, and extremely high risk-adjusted yields.
• That should serve as the fuel for the next leg higher in the impending bull market.

The bears had two days to bask in the sun this week, as concerns about a banking crisis reemerged with earnings results from First Republic. The regional lender revealed a much larger loss of deposits than expected, which sent its stock price reeling and dragged down the rest of the sector. Yet we have learned that one bank's loss is another bank's gain in what has been a crisis entirely focused on deposits. Those concerns and the market losses that resulted on Tuesday and Wednesday, breathing new life into the bearish narrative, were summarily dismissed yesterday in a monster rally for the major market averages. The bottom line is that corporate earnings results for the first quarter are coming in better than expected, which is levitating stock prices.

Still, a credit crunch is now considered to be the biggest tail risk for markets among global fund managers polled by Bank of America this month. That supplanted worries about sticky inflation forcing the Fed to keep raising short-term interest rates, which is still a primary concern. Yet the stock market continues to climb the wall of worry.

This is occurring despite fund managers now being more underweight stocks relative to bonds than at any other time since the bear-market low during the Great Financial Crisis in March 2009.

In lieu, investors have flooded the bond market with cash at the expense of stocks to the extent that institutional investors have not been this overweight the asset class since the Great Financial Crisis in March 2009. This inflow is also driving bond yields lower, which with an inverted yield curve is making short-term yields the most attractive place to park cash.

Investors are piling into the safety of money market funds that are liquid and paying 4-5% right now, but these yields are variable and will not last once the Fed starts to lower interest rates. According to the Investment Company Institute, money market funds climbed to a record $5.28 trillion as of April 12. While the growth rate in this amount has slowed demonstrably over the past month, as bank outflows have moderated, it is still a tremendous amount of liquidity.

I expect that as inflation continues to recede, the economy continues to grow below trend, and investors anticipate the next easing cycle from the Fed, the explosion in money market balances will serve as $5.28 trillion reasons for stocks to move higher. The focus is likely to be on those names that have more attractive yields than the bond and money markets, more reasonable valuations than the market indexes, and decent growth prospects.

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