The Wall of Money – Another Reason to be Bullish

VT Tyndall North American Fund

The Wall of Money – Another Reason to be Bullish

One of the most notable aspects of the market so far in 2021 is the huge amount of money flow going into equities. This is not a huge surprise given the fact that there is a lot of liquidity sloshing around the system at the moment, but that notwithstanding the numbers reached an all time record last week.

Largest week of global equity inflows ever
Weekly global equity inflows ($bn)

The interesting thing to note is that the liquidity in the system does not only exist at the corporate level, but at the personal level too. The savings rate in the US is currently 13.7%, more than twice the average. The Covid recession had the statistical anomaly of being the only recession when personal income actually increased; due to the government hand outs and limited means of spending. This wall of money is of course finding its way into equity markets and is happening at the same time as the switch out of bonds into equities is in its early phase. This is an extremely bullish signal and is one of the reasons we are so positive on stocks.

The other is the economy itself. We are beginning to see signs of how big the recovery is likely to be. Retail sales for January came out this week and showed a rapid acceleration from +2.5% yoy growth in December to an astonishing +7.4% yoy in January. The scale of the acceleration is very rare. Remember, of course, January 2020 was pre-Covid so expect even bigger numbers when we start comparing against
those base effects in March and April, which will be the lowest in living memory. The recovery plus the money flow makes equities the stand out asset class.

What’s interesting however is where this money is going within equities. It is no longer solely being funneled straight into an S&P 500 tracker, as has been the case for many years now. With such a big economic recovery clearly upon us, investors have been much more selective in determining their exposures; small caps have been a big beneficiary, as have the more cyclical areas of the market. The commodity complex, which performs well as the cycle turns up, has been in a very strong bull market since June.

The CRB Commodity Index

The lack of flow going into the S&P 500 trackers also goes some way to explaining why the Mega Cap tech stocks have been relative underperformers these past several months. There are simply better places for capital to go and this has benefitted actively managed funds that do not have exposures to top-end index names, but has also benefitted more specialised passive strategies. The ARK Funds managed by Cathie Wood are focused on future technologies and have taken $8.2bn so far this year, outstripping both Blackrock and State Street passive operations. This broadening out is to be welcomed and is another reminder to investors that there is much more to the market than just mega cap tech growth stocks.

19th February 2021
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Data source (unless otherwise stated): Bloomberg
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