Here’s How Money Moved This Week — ICYMI

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Friday marked the second day in a row in which stocks fell more than 1% in the morning, before rebounding to end the day. Between the two days, the S&P 500 eked out more than a 1% gain, in a fairly broad rally. 

Still, data from Bank of America Global Research shows that the move this week was largely risk-off. And indeed, a re-spike in coronavirus cases as states reopen is in the back of investors’ minds, even the ones that are largely bullish on a fast economic recovery. 

Here were the weekly flows of capital:

  • Cash: +$35.6 billion 
  • Bonds: +$15.8 billion 
  • Stocks -$6.2 billion (that’s an outflow) 

Indeed, the S&P 500 lost 2.5% this week, as did the S&P Global 1,200 index. The 10-year treasury price rose, pushing the yield down to 0.64% from 0.69%. And according to a combination of data from the St. Louis Fed, which is only updated through May 4, UBS Wealth Management and Bank of America, cash holdings sit at just under $5 trillion. That’s a more than 112% increase since early February. Cash holdings even rose past the bear market low of March 23, as fund managers added to positions tepidly in April. Meanwhile, treasury prices had already run up a bit. 

And the move into treasuries has accompanied the move into stocks. The 10-year yield was at 0.85% in late March. 

Of course, the rally has been liquidity driven -- the Fed is supporting all areas of both the primary and secondary bond market through its special purpose vehicles. But low rates and added money supply can only keep parties liquid. It can only support consumer spending, keeping it from falling even harder than it is (retail sales for April dropped 16% against estimate of a 12% drop). 

However, many agree that the demand side of the economy has to respond. Consumers must shake their trauma, recoup their lost jobs and spend vigorously. Reopenings may cause a re-spike in virus infections, undermining the speed of a recovery. And low rates have driven earnings multiples to extraordinarily high levels. 

One positive sign: China’s economy is beginning to recover, according to Morgan Stanley economists and strategists, who recently published a note in which they say they expect a v-shaped recovery and economic trough in the second quarter of the year. The team at Morgan Stanley says, as China’s manufacturing sector (40% of GDP) returns to pre-virus levels, the country will see a 100% return to prior total output levels. They recognize that the U.S. GDP is 70% comprised of consumer spend, but they do expect the U.S. to still have a strong recovery. 

Case in point: many investors are still nervous, and the S&P 500 is still 16% below its all-time high, pricing in less of a quick recovery than it was last week. 

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