Author: David I. Templeton, CFA, Principal and Portfolio Manager
It is often said that actions speak louder than words and for investors, there seems to be quite a divergence. By many sentiment measures investors are indicating they are bullish on stocks. The American Association of individual Investors (AAII) weekly sentiment survey shows bullish investor sentiment equals 51.3%, above the average plus one standard deviation level of 47.7%.
Sentiment measures like these are viewed as contrarian ones and with this heightened level of bullishness, a market pullback, even if shallow and short lived, have a tendency to occur. Another sentiment measure, the CNNBusiness' Fear & Greed Index, is indicating sentiment is in the Greed range.
With investors' expressing bullishness, their actions seem to be contrary to this though. On a total return basis the S&P 500 Index is up 24.9% year to date though this past Friday. In spite of the strong equity return investor flows into equity mutual funds and ETF's have been negative this year. On a year-to-date basis the combined equity outflows from U.S. and International equities total $165.9 billion. Bonds on the other hand, while mostly generating a positive but lower return, have seen inflows of $160.6 billion. Since the beginning of November, the upward sloping maroon line in the below chart does signify that U.S. equity flows have turn positive.
Clearly, the equity market has recovered nicely in 2024 after a poor year in 2022.
With the strong return this year, and with some technical indicators indicating an overbought equity market, a pullback would not be surprising. One potential cushion that might dampen the extent of a pullback is the level of cash on the sidelines. As the below chart shows, money market mutual fund cash equals a record $5.9 trillion. Money market cash for both institutional and retail investors is up significantly since the 2020 recession. In a pullback some of this cash might find its way into stocks.
With investors expressing a high level of bullishness, this contrarian indicator would be one that suggests near term equity market caution. However, mutual fund flows and money market levels, that is, investors' actual actions, suggests the opposite. With the end of the year fast approaching and a potential Santa Claus rally nearing, maybe positive equity returns do continue for investors.
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