Record money shows investors who are not convinced by the stock market’s bull run

  • Investors aren’t fully buying the stock market’s bullish narrative this year, according to Bank of America.
  • That is evidenced by fund flows and a record $5 trillion in cash in US money market funds.
  • BofA said the “pain trade” for stocks remains higher, but that investors should fade the S&P 500 at 4,100 to 4,200.

Investors haven’t quite bought into the stock market’s bullish pivot in 2023 after a brutal selloff last year wiped out trillions of dollars in market capitalization.

That’s according to a Friday note from Bank of America, which highlighted the fact that as interest rates remain at multi-year highs, cash held in money market funds has reached a record $4.8 trillion.

“Investors trading at attractive yield levels,” said BofA’s Michael Hartnett. Most money market funds currently yield around 4 percent.

Investors’ fear of stocks can also be found in fund flows so far this year, which have been strong for fixed income and emerging market stocks, but weak for US stocks. Investment grade and high yield debt had the strongest inflows since September 2021, averaging $7.7 billion over the past month.

Meanwhile, emerging market debt and equities have seen the strongest inflows since March 2021, averaging $7.1 billion over the past four weeks. Emerging market shares are one of the best areas of the market so far this year.

While investors are pouring money into fixed income and international stocks, they are pulling money out of US tech and health stocks, according to BofA, which called the move “capitulation.” The outflow trend in the last month from these two sectors is the worst since January 2019, according to the note.

Another sentiment indicator that shows investors are bearish on stocks includes the weekly AAII Investor Sentiment Survey. The latest survey showed bearish respondents at 36.7%, outweighing bullish respondents by just 28.4%.

The reading from the AAII represents a continuation of persistently bearish investors that started over a year ago. In fact, 57 of the last 58 weekly surveys showed bearish respondents outweighing bullish respondents, a record since the surveys began in 1987.

But Hartnett sees good reason for bearishness, and while he admits the “pain trade” for the stock market remains higher, he advises investors to pull back from the S&P 500 when it hits the 4,100 to 4,200 range.

“All signals [suggest a] hard landing will occur in 2023; but another tightening of economic conditions this spring may be needed to tip a US economy currently growing >7% in nominal terms into the recession consensus wants,” Hartnett said.

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