Investors were largely not risk takers this week and they are likely awaiting the next iteration of fiscal stimulus to reverse that. Virus cases surged this week, putting a dent in market sentiment.
Before we get into some market details, here’s how global capital moved this week, according to Bank of America Global Research’s fund manager survey:
- Equities: -$7.1 billion (that’s an outflow)
- Bonds:+ $19.2 billion (that’s an inflow)
- Investment Grade Bonds: +$14.1 billion
- High Yield Bonds: +$1.3B (smallest inflow in two weeks)
- Cash: -$7.6 billion
Investors were evidently drawing from the huge cash piles they had built up in the first quarter of 2020, the quarter during which the coronavirus wiped out global risk assets, in order to buy high-quality bonds rather than riskier assets. Investors, while slowly adding to their equity exposure as the economic recovery looks to be underway, are still underexposed to equities. wealth managers TheStreet has spoken with mostly say their clients’ equity holdings are less than 60% of their total portfolios. Bank of America’s private clients are holding a touch under 58% of their portfolios in stocks and 13.5% in cash. B-of-A’s data last week said retail investors were holding roughly 5% cash, which isn’t exactly low. These data points mean that stocks could drift higher in the near-term, and indeed, B-of-A is “tactically bullish" although "strategically bearish."
On the week, the S&P 500 had fallen 2.3% by 2 pm EDT Friday. Globally, the MSCI World Index fell 0.6%. The iShares iBoxx Investment Grade Corporate Bond etf was flat, somewhat consistent with investors’ move into the asset class. The iShares iBoxx High Yield etf fell 1.6%, also somewhat consistent with the undersized inflow into the asset class. High yield spreads in the U.S. widened a few basis points to 6.3%, according to St. Louis Fed data. The 10-Year Treasury yield fell to 0.64% from 0.7%.
The main driver of the risk-off sentiment: virus cases surged in the U.S. and rose in some other parts of the world. Investors began to fear more lockdowns. Texas reimposed closings on all bars in the state.
Investors know that the Federal Reserve will keep pumping liquidity into all areas of the bond market. Stock valuations, by historical standards, are pricing in most of the interest rate environment, although forward earnings estimates have rolled over by one quarter this month, while stock prices have stalled. That has brought earnings multiples down a bit because earnings estimates for the next year are now higher. But the premium return investors are demanding in stocks relative to safe bonds currently may be warranted, given the risks.
One such risk: if lockdowns become a widespread theme again, Congress may need to appropriate more funds to be spent, potentially by allocating more checks to households. That provided a bridge to better economic data, which the market has observed of late. Another bridge may now be necessary, especially if more layoffs ensue or if unemployment generally remains elevated. Financial conditions have already been loosened by the Fed.
Good news for employment at large corporations, "In the big corporate market, you’ve done okay and should be able to withstand what happens next,” Ted Swimmer, head of corporate finance and capital markets at Citizens Financial told TheStreet, referring to the $1 trillion of investment grade debt raised by U.S. companies in May as rates have fallen. "Companies that are smaller and can’t access the bond market, if there’s another wave of this, will take a lot of pain.”