Whether exuberant market sentiment can last and the basis for a pro-risk investing stance were the topics of two industry reports on Monday.
In weekly equities commentary, Richardson Wealth considered the fast-flowing dollars of retail investors, noting that U.S. equity fund and ETF inflows have jumped higher, with a rolling three-month total of about US$100 billion.
“That may not sound like that much, but this is the first meaningful positive inflow since early 2018 — three long years ago,” the report said.
Heightened investor confidence is also evident in market sentiment indicators such as the AAII Bull/Bear survey, which currently shows bullish U.S. investors outnumbering bearish ones by about 32 points.
“When this spread goes +/- 20, we take notice, as it’s historically been a predictive contrarian indicator,” Richardson Wealth wrote. “Elevated sentiment has historically resulted in lower future returns as an overly optimistic mood typically follows a strong run for equities.”
Other sentiment indicators include a decline in cash held by institutional managers, a rising ratio of insider sales to buys and increasing margin debt.
“With various tools all giving similar readings, it’s difficult not to be a little nervous” about a market correction, the report said.
Richardson Wealth’s bottom line was to be prepared to add defence quickly, “because when the momentum breaks, the market will fall.”
In a weekly commentary, global asset manager BlackRock described its current investing stance as “pro-risk.”
BlackRock’s view is based on a strong restart of the U.S. economy powered by pent-up demand and excess savings, which the asset manager doesn’t expect to translate to significantly higher interest rates.
“The Federal Reserve is building credibility in its new framework and has set a high bar to change its easy policy stance, even in face of higher realized inflation,” the BlackRock report said.
The asset manager said it remains overweight equities, neutral on credit and underweight bonds on a tactical basis.
BlackRock warned of volatility as markets “test the Fed’s resolve to stay ‘behind the curve’ on inflation.” Stay invested and look through any related turbulence, the report suggested.