Furious Fund Flows – Is The U.S. Stock Market in a Bubble or Not?

Ready to put the "fun" in "fund flows?" Today we pin down why Wall Street's favorite investment signal should join the chorus of Auld Lang Syne.

Bubble, Bubble … Are We in Bother?

Ch-ch-ch-ch-changes. Flip and face the unusual, if you wish to be a richer man.

Right this moment, we’re speaking about adjustments. Particularly, adjustments within the ever-exciting world of market fund flows!

Fund flows? Wake me when it’s over … zzzz.

Don’t nod off: You’ll wish to hear (learn?) this one … particularly if you happen to take heed to the speaking heads on Wall Avenue telling you that we’re not in a bubble.

Nice One Naftoli N. wrote in at 12:34 a.m. my time (apparently, neither of us sleep) to ask the next query:

The article, titled “The top reason US stocks aren’t in bubble territory, according to Fundstrat’s Tom Lee,” comes from Enterprise Insider. I’m wondering what it’s about? Be happy to click on over and skim … I’ll wait.

For these nonetheless right here, the gist of Lee’s reasoning is that this:

Of the $3.1 trillion in retail fund inflows since 2008, simply $183 billion, or 6%, went into the inventory market. And up to now three years, fund flows into shares have been weak, regardless of a virtually 70% surge within the S&P 500. 

In a be aware to shoppers detailing this knowledge, Fundstrat’s Lee stated: “I don’t see how this marks even the proximity of a high for equities.”

Historical past of the World, Half I

Fund flows are basically that — where investment funds flow, or where investors put their money.

Are you misplaced but? Let’s again up a minute.

Fund flows are mainly that — the place funding funds circulation, or the place traders put their cash. The vast majority of fund flows are pushed by mutual fund and ETF exercise — you already know, the stuff you maintain in your 401(ok).

The present line of considering is that when cash flows into bonds, it’s unhealthy for inventory costs … and vice versa.

The contrarian viewpoint to that is that the extra money flows into bonds … the extra money can circulation again into shares.

That is the argument that Lee makes. How can we be in a inventory market bubble when a lot of the cash up to now three years went to bonds?

Certainly these traders will notice the error of their methods and transfer that cash into the inventory market, thus shifting the market increased. As we each know, stonks solely go up, so why hold that cash in boring previous bonds?

In different phrases, billions of {dollars} sit on the sidelines simply ready to circulation into shares. Since all that money isn’t energetic available in the market, there can’t be a bubble. The market can nonetheless go increased. That is what number of speaking heads on Wall Avenue see our present market state of affairs, and these fund flows have turn into a crucial funding sign.

I say “turn into” as a result of this specific sign is just about 25 years previous. Earlier than 1995, nobody actually eyed fund flows … or at the least cared whether or not there was a correlation between cash shifting between shares and bonds.

“By no means earlier than have we had a interval the place mutual funds have so constantly dominated the demand aspect of the market,” quipped a Wall Street researcher in the New York Times after equity-fund gross sales hit a month-to-month file in July 1995.

“Issues are totally different now,” many Wall Avenue watchers stated. You inform me what occurred subsequent.

Historical past of the World, Half II

However, things began to ch-ch-ch-change in the fund flows game back around 2017.

This pattern continued nicely into the 2000s and remained so dependable, funding corporations like Fundstrat use it as a cornerstone to foretell market exercise — which they, in flip, use to persuade you and Naftoli into believing their interpretation about market timing.

Nonetheless, issues started to ch-ch-ch-change within the fund flows recreation again round 2017.

Regardless of shares hovering to file highs, funds have flowed as an alternative into bonds for the previous three years — as Tom Lee’s knowledge signifies.

The multibillion greenback query is: Why?

If Lee is right, traders ignored the file market rally of the previous three years in favor of decrease returns in bonds. By Lee’s logic, traders are clearly simply biding their time for the fitting second to pile into shares.

But when that was true, why didn’t fund flows shift fully again towards shares in December 2018 when the market corrected? Or in March 2020, when the market took a nosedive?

Each of these months marked notable blips the place fund flows favored shares over bonds, it’s true. However these traits died shortly. It’s nearly as if traders took benefit of market corrections after which instantly took earnings…

So, simply what within the wild, wild world of sports activities is a-goin’ on? Again in September 2020, Morningstar researcher John Rekenthaler concluded:

Extra proof is required earlier than concluding that the fund-flows indicator has outlived its usefulness, however till the sign turns into extra dependable, its pronouncements ought to be consumed with a big spoonful of salt. 

So, Naftoli, my reply to you is that Fundstrat’s “no bubble” prediction is working on an previous mannequin — born in 1995 — that seems to be altering. The fund-flows indicator isn’t as dependable because it was. By itself, it doesn’t imply we’re in a inventory market bubble … but it surely additionally doesn’t preclude a bubble, both.

Why You Ought to Neglect Fund Flows

As for why the fund-flows indicator doesn’t work these days, I’ve a two-part concept:

  1. Child Boomers are retiring en masse. The technology answerable for the most important supply of retail market fund flows is in retirement mode. The place do (ought to?) traders put their cash once they retire? In safe-haven, strong development investments like bonds, money and money equivalents. And that seems to be the case for Boomer retirees proper now.
  1. Millennial traders — the technology set to interchange Boomers as the most important supply of retail market fund flows — are scared $#!&less. These traders simply dug themselves out of two recessions and eventually discovered good jobs round about 2016 or 2017. It ought to come as no shock, then, that once they lastly get the chance to take a position, Millennials are enjoying it protected. Again in 2018, Douglas Boneparth, president and founder of Bone Fide Wealth noted: “Even millennial shoppers we work with have 20% in fastened earnings.”

If my concept is right, it implies that the previous fund-flows indicator is lifeless. It additionally reinforces the concept hypothesis, not funding, drives the market to new all-time highs — as a result of funding capital is heading disproportionately to the safer and steadier investments.

Thanks once more to your query, Naftoli … the reply was fairly a journey.

As for you on the market — sure, you! — how do you are feeling about your retirement? To not put you on the spot or something… However are you feeling “good-ish?” Possibly you possibly can be a tad extra prepped?

How shut would you be to reaching all of your retirement objectives if you happen to may constantly rack up good points 10 instances … 13 instances … even 42 instances higher than the S&P 500?

Should you ask Synchrony Financial institution, the typical American has roughly $100,000 in retirement financial savings. And my colleague Ian King has uncovered a easy technique with the potential to show that common retirement account into as a lot as $1.2 million — in simply 5 years.

Click here for what Ian King calls the “20-Minute Retirement Solution!”

Great Stuff, The Good, The Bad and The Ugly

The Good: It’s a Mu Level

Both Deutsche Bank and RBC Capital Markets lifted their price targets on MU by 13% and 46%, respectively.

Micron Know-how (Nasdaq: MU) simply acquired itself a shiny new double upgrade on behalf of Citigroup analysts today. Christopher Dan upgraded the reminiscence maker from promote to purchase, with a worth goal increase from $65 to $100 to comply with.

Feeling all contemporary and fancy-free, MU continued to fawn within the analyst limelight as we speak. Each Deutsche Financial institution and RBC Capital Markets lifted their worth targets on the inventory by 13% and 46%, respectively.

The upside is obvious to all, apparently: The pandemic purged the DRAM chip provide chain of its pre-pandemic glut, and analysts imagine chipmakers like Micron now stand in the beginning of a “long-awaited upturn.” MU is up about 5% as we speak, and we’ll get a deeper take a look at the corporate’s place within the reminiscence market when it reviews earnings in only a few days.

The Dangerous: Sachs Sacks Photo voltaic

Goldman believes that First Solar already had its day in the sun … that its earnings and margins have peaked, and the stock now faces “cyclical headwinds.”

On the opposite aspect of the analyst appreciation fence, Goldman Sachs simply did First Photo voltaic (Nasdaq: FSLR) soiled. Sachs pegged the solar-power techniques firm from purchase all the way in which all the way down to promote — what’s identified on the drama-loving Street as a double downgrade. That’s like a “breaking apart by textual content” sort of blow-off.

So, what provides? Goldman believes that First Photo voltaic already had its day within the solar … that its earnings and margins have peaked, and the inventory now faces “cyclical headwinds.” However this isn’t the primary time that ol’ Photo voltaic’s been smacked throughout the face by an analyst reversal.

Nay, it was eight Tuesdays in the past on November 10 that Raymond James also swung from bullish to bearish on FSLR — and for roughly the identical causes too. The Biden Presidency may go after repealing tariffs which have since saved sure competing photo voltaic system makers at bay.

And, regardless of the general photo voltaic trade seemingly benefitting from a Biden push into renewables, First Photo voltaic’s thinning margins would have it stumbling to the again of the pack. FSLR was down about 5% as we speak on the information, however make no mistake: The renewable vitality market is right here to remain, with or with out First Photo voltaic.

And apart from, we’ve harped about higher buys on the market within the vitality house ever since Luke left for Tosche Station to select up these energy converters…

Click here for your one can’t-miss new energy play!

Ugly: Generic Identify+

All told, the service brings heat to the content-streaming table with more than 55,000 episodes of more than 2,500 shows, including some Discovery+ originals as well.

I’ll get flak from you HGTV heads on the market … however why oh why did Discovery (Nasdaq: DISCA) decide now to launch Discovery+?

You don’t get the “bored whereas Nana’s on the town” vacation crowd. Practically everybody’s again to the digital faculty grind by now. It’s both means too early within the yr … or only a tad too late, don’t you suppose?

And but, the umpteenth streaming service made its stateside debut this week. Discovery+ brings collectively all of the semi-reality present content material you’re keen on, kinda like and doubtless go to sleep by from the Meals Community, Animal Planet, HGTV, TLC, A&E, DIY, OWN and a number of different snappy acronyms.

All instructed, the service brings warmth to the content-streaming desk with greater than 55,000 episodes of greater than 2,500 exhibits, together with some Discovery+ originals as nicely.

Me? I didn’t want to sit down by Vanilla Ice’s renovation present the primary time round. Possibly I’m lacking the purpose with Discovery+. I’ve been instructed “nicely, possibly you’re not the Planet Earth goal market.” Or, individually: “Possibly falling asleep to Man Fieri’s dulcet tones simply isn’t your bag.”

I concede, and I digress. Nonetheless, Discovery simply jumped headfirst right into a uneven, uneven streaming sea, which is the one cause why I marked it as “ugly” as we speak. DISCA has stayed in a gentle upswing since information of the service broke over a month in the past.

Nice Stuff: I’m Not Saying It Was Aliens…

One other yr, one other shot at Greatness! Or, as we name it round right here, Reader Suggestions.

It’s the identical recreation as at all times: You write us a fast memo with no matter’s in your thoughts, and we accumulate the cream of the crop to ramble on each Thursday. And I imply no matter — inventory market associated or in any other case.

Bought a commerce in your sights? We’d love to listen to about it! Able to rant concerning the crowded streaming market? You guess I’m all ears. Bourbon suggestions? Ship ‘em in! is the place you’ll be able to write to us night time or day — that is electronic mail, in spite of everything — with all these market meme-worthy ideas you’ve gotten. Drop us a line proper now!

We’ll catch you on the flip aspect! Till then, don’t neglect to comply with us on social media too: Facebook, Instagram and Twitter.


Joseph Hargett

Editor, Nice Stuff

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