Investors have put more money into stocks in the last five months than the past twelve years

The latest wave of market enthusiasm has brought with it a stunning rush of money, in which more of investors’ cash has gone to stock-based funds in the last five months than the previous twelve years combined.

That statistic, from Bank of America, reflects a period in which the ASX increased by 16% & the Dow Jones rose by 26%.

At the same time, the market has undergone some wild trends that included a massive influx to meme stocks such as GameStop and AMC Entertainment. Trading volume rose 40% in the first quarter from the previous three months, with investors snapping up sectors that performed poorly last year amid hopes for a pronounced economic rebound from the slide in 2020.

Amid the frenzy, some $569 billion has gone to global equity funds since November, compared with $452 billion in the previous 12 years.

Those numbers easily could exacerbate ongoing worries about financial market bubbles as valuations are around the same levels as just before the dot-com bubble popped in 2000. But these are not ordinary times.

“There’s a certain amount of logic to markets right now,” said Art Hogan, chief market strategist at National Securities. “It’s less about irrational exuberance in the overall market, less about the 1999-2000 levels, and more about what’s the driver. The driver is clearly an explosion in economic activity that likely will have some earnings growth in its wake.”

First-quarter earnings season kicks into gear next week, and sentiment is running high.

Year-over-year profits are expected to expand by 23.8%, which by itself would be the best growth rate since the third quarter of 2018.

However, what’s even more remarkable is that analysts continue to ratchet up expectations as the profit reports near, which is the opposite of what usually happens. Wall Street generally trims its outlook the closer it gets to the report date.

Hogan said investors worried about a bubble should be watching earnings season not only for results but also guidance, and look at inflation numbers coming out to see how hot the economy is running.

“The best time to get your head wrapped around that is likely ahead, so focus on the next several weeks,” he said. “Look at guidance, that will be the tell. That tends to act as a regulator for the market.”

The wealthy are investing like a market bubble is here,

Only 9% of millionaires surveyed by E-Trade think the market is nowhere near a bubble. The rest of the affluent investors set:

16% think we’re “fully in a bubble”
46% in “somewhat of a bubble”
29% think the market is approaching one

Yet these affluent investors are not running from the market, or parking money in cash.

In fact, amid rising bubble fears these same investors say their risk tolerance has increased.

The rollout of the Covid-19 vaccines, even if off to a slow start, and the prospect of another even larger stimulus package from President-elect Biden, has investors doing what market history says they should do: look ahead.

“There is a broader recognition of an economy that is improving and signs that the factors are in place for the market to move higher,” said Mike Loewengart, chief investment officer at E-Trade Financial’s capital management unit.

There is a lot of chatter right now about an overextended market and a dotcom bubble-like environment, making it hard to tune out the noise for many investors. But among these affluent investors, even with their own bubble fears rising, they are increasingly bullish and more bullish than the broader investor universe. 64% of millionaires are bullish.

The rotation into value stocks, small-cap stocks, and depressed sectors like energy and financials, is already a well-charted phenomenon — the so-called “great rotation” — and these investors are no exception.

While it has been the growth stocks that outperformed in the past few years, investors are taking the opportunity to move to more cyclically oriented sectors of the market.

Even with millionaires more likely to say they are making changes to their portfolio allocations, the S&P 500 sector by sector bullishness has not changed that much, according to the survey, showing that for every investor who is taking part in the rotation to value names and more cyclical plays there are still many letting their market money ride on the winners.

If political and election risk was a major factor in Q4, it saw a major downgrade from investors this quarter.

The percentage of affluent investors who view the new presidential administration as the biggest risk to their portfolio declined down from 50% to 30% this quarter.

The latest phase of this bull market, the post-Covid Spring 2020 phase, has been marked by a risk-on appetite for new offerings, IPOs and SPACs, as well as a surge in new asset classes like cryptocurrencies, including bitcoin.

Wharton School finance professor Jeremy Siegel said Thursday he expects the stock market’s rally will persist at least throughout this year. However, he told CNBC that investors will have to be cautious once the Federal Reserve adjusts its highly accommodative monetary policies.

“It isn’t until the Fed leans really hard then you have to worry. I mean, we could have the market go up 30% or 40% before it goes down that 20%” following a change in course from the Fed, Siegel said on “Halftime Report. “We’re not in the ninth inning here. We’re more like in the third inning of the boom.”

Siegel said he expects to see a roaring economy this year as the last of Covid-era economic restrictions are lifted and vaccinations allow for travel and other activities to pick up again. That is likely to unleash inflationary pressures, though, he said.

“I think interest rates and inflation are going to rise well above what the Fed has projected. We’re going to have a strong inflationary year. I think 4% to 5%.”

Economic conditions of that nature will force the central bank to act sooner than it currently anticipates, Siegel contended. “But in the meantime, enjoy this ride. It’s going to keep on going ... toward the end of the year.”

One of the key reasons why stocks can still rally despite a pickup in inflation is because owning equities would still be better than bonds or holding cash, Siegel said.

“People are going to turn around and say, ‘OK, so there’s more inflation and the 10-year is rising? What am I going to do with my money? Does that mean I want to be out of the stock market when [corporations] have more pricing power than they probably have had in two decades or more?’” Siegel said. “No, not yet.”

At some point, Siegel said the calculus for investors will change.

“Eventually, the Fed is just going to have to step in and say, ‘Wow. We’re just having a little bit too much inflation.’ That’s the time to be cautious,” Siegel said. “I would not really be cautious right now. I still think bull market is on for 2021.”

Source: https://www.cnbc.com/2021/04/09/investors-have-put-more-money-into-stocks-in-the-last-5-months-than-the-previous-12-years-combined.html?&qsearchterm=investors%20have%20put%20more%20money

https://www.cnbc.com/2021/04/08/jeremy-siegel-says-stock-market-could-go-up-30percent-before-boom-ends.html

Matthew McCabeApril 11, 2021