© Reuters. FILE PHOTO: FILE PHOTO: The Charging Bull or Wall Street Bull is pictured in the Manhattan neighborhood of New York City
By Thyagaraju Adinarayan and Sujata Rao
LONDON (Reuters) – Equity funds have surged more than $ half a trillion in the past five months, outperforming inflows over the past 12 years.
The flows also raise fears of a retreat from record highs as valuations are at their highest since the dot-com bubble in the late 1990s and trading is nearly 22x its futures profit.
“Goldilocks and melt-up are popular terms this week and we believe this can be seen in market valuation,” said Emmanuel Cau, head of European equity strategy at Barclays (LON :). “We remain optimistic, but we see fewer advantages from our point of view.”
Deutsche Bank (DE 🙂 said this week it expects a 6% to 10% decline over the next three months when economic growth peaks.
This was followed on Thursday by a massive $ 40 million bet in the U.S. options market that the Cboe Volatility Index – often referred to as the Wall Street fear measure – will fall above the 25 level and rise towards 40 by mid-July.
The trade is currently at 17 points, the lowest level since early 2020.
“You should definitely be concerned about valuations, and even more so when people start to justify extremely high valuations,” said Fahad Kamal, chief investment officer at Kleinwort Hambros.
“We are risky but have not stepped foot on the accelerator based on valuations in some parts of the market.”
SIGNALS OF STRESS
A record $ 576 billion has flowed into equity funds since November – more than $ 452 billion in the last 12 years combined, all thanks to ultra-light monetary policy and unprecedented incentives.
At the start of the second quarter with the second-highest earnings multiplier in more than 100 years, many traditional market signals, ranging from surveys of private investors to valuations, are flashing yellow.
Some of those worries have spread, with investors investing more than $ 120 billion in cash funds in the past three weeks. However, according to BofA, the equity allocation is still at a record 63.6%.
However, Kamal said there is no alternative to stocks as hopes for bonds that offer real yield are dwindling.
Still, there are many signs that some of the world’s largest stock markets are ripe for retreat.
On a technical basis, the S&P 500 benchmark is in overbought areas. The Relative Strength Indexes (RSI) – a measure of upward and downward momentum from 0 to 100 – are at 70, which makes them prone to profit-taking.
The mood is also bullish. The latest sentiment poll by the American Association of Individual Investors (AAII) found that retail investors have been the most optimistic over the past three years.
“Sentiment is in a very worrying area, as is valuation, but cash flows are driving the indices higher,” said Tobias Levkovich, Citi’s chief US equities strategist.
Graphics: S & P 500 and STOXX 600 on overbought levels https://fingfx.thomsonreuters.com/gfx/buzz/bdwvkbrydpm/Pasted%20image%201617965407898.png
Graphic: AAII survey https://fingfx.thomsonreuters.com/gfx/buzz/xegpbxkenpq/Pasted%20image%201617965171723.png
Graphic: Global equity valuations rise significantly above long-term averages https://fingfx.thomsonreuters.com/gfx/buzz/qzjpqzkmevx/Pasted%20image%201617965572450.png