Here's How Money Moved This Week

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Investors put money into funds of rather safer assets this week, contrary to the way prices moved.

Before we analyze, here’s where global capital went, according to Bank of America Global Research:

  • Stocks: -$2.3 billion (that's an outflow)
  • Cash: -$600 million
  • Government Bonds: +$3.8 billion (inflow)
  • Investment Grade Bonds: +$12.5 billion
  • High Yield Bonds: +$5 billion

Investors were drawing upon their currently large cash piles (built up during the advent of the pandemic) to put that money to work in safer funds.

These capital flows are in stark contrast to the price movements seen in the financial market this past week. Managers were selling U.S. government bonds this week, with the 10-Year Treasury yield up from 0.71% to as high as 0.80% Friday afternoon, the highest level the yield has been at since early June when the market was highly optimistic about a V-shaped economic recovery. That optimism has returned, but with a slightly more muted move up in the risk-free rate. In a classic risk-on market movement, the S&P 500 rose over 3.5% for the week with strong participation from large cap value stocks, which rose a similar amount. Large cap growth rose just under 4%.

Investors, eyeing fiscal stimulus, appear optimistic that the V-shaped recovery in earnings going into 2021 is on track. That’s even as President Trump continues to throw monkey wrenches into the negotiation process with Congress.

Economic data have largely pointed to a speedy recovery in the labor market and consumer spend. While small businesses not fully reopened need liquidity soon to keep employees and remain operational, $1.8 trillion of stimulus may be on the way.

This week’s flows suggest investors want to own relatively safer assets in addition to owning stocks. Many investors, including Bank of America’s private clients are near “full” equity exposure. B-of-A clients on average, hold roughly 60% of their portfolios in stocks. Some are executing barbell strategies, in which an investor holds volumes of two different assets with an opposing price correlation to each other. Currently, stocks -- value and growth, sector by sector -- are valued somewhere close to fairly compared to interest rates. Earnings momentum can bring stocks higher. But if lockdowns come back into play with the cold weather, no matter how much stimulus there is, treasury bonds may outperform stocks for the near-term.

Investors want a hedge. 

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