A useful relationship has been long held between the SP500 and Retail Money Funds. Near-term highs in Retail Money Funds are always associated with the level of market pessimism and closely correlate with significant SP500 cycle lows. That pattern is unmistakable since Jan 1990, the last 36yrs.
Today, both series are at record highs, but the details that underscore the relationship remain. The drivers of the SP500 are the “recession proof” high tech issues believed to be so immune to economic downturn that 10 of these now represent over 40%+ of the total value of the SP500. What is different in this cycle is that the mega-sized Momentum-driven portfolios are chasing these select issues because they are economically pessimistic. The same is true for retail investors which is why Retail Money Funds are also at record levels. That is, pessimism has driven a wild imbalance in markets currently that has been with us pre-COVID. If one examines many individual companies, a pattern emerges in 2015 reflecting this. Well operated companies gradually lost their prior premiums to high tech sector thought to be impervious to economic collapse. The COVID lockdowns confirmed this invulnerability in investor’s minds and remains today now bolstered with a growing chorus for more lockdowns due to Hantavirus.
By now, if you have been listening even a little, you recognize that a power struggle has been ongoing between the old guard and the current approach by the new administration. This struggle is between a top-down globalism vs individual sovereignty of countries. The current administration has demanded reciprocal fair tariffs with trading partners which is forcing a US reindustrialization. A rebuilding of US manufacturing capacity is beginning that was lost since 1970 when we began to ship US intellectual property to cheaper labor production venues. A long held political/economic policy is being reversed by the current administration. A good overview is provided by Barbara Boyd and Susan Kokinda. https://www.youtube.com/@
Many large financial interests are battling for control that they do not want to lose by these actions. The media is not neutral with the old guard having captured much of the outlet content by way of having influenced our educational, healthcare and other self-governance institutions across past decades. But, nonetheless even though powerful, the influencers of the past are losing to the new trends which favor free speech and individual property rights. We are in the middle of what is a confusing period of transition without a determined outcome. In my opinion, individual freedoms and nation state sovereignty with fair trade is winning out and has the winning hand. Free speech always has the winning hand as does truth.
The current status leaves the largest financial players at risk. They are dependent on Momentum investing long derived from the 1952 mathematical model called Modern Portfolio Theory. This is a top-down model that has infiltrated every piece of investment advice and has trapped many precisely because it ignores the human details of corporate management. It has led to our current situation of high pessimism by large financial interest aggregating capital into a few companies thus driving their valuations to historically nonsense levels while at the same time defining them as “value stocks”. Meanwhile, individual management teams at well operated companies have been busy buying shares for their own portfolios knowing that at some point this nonsense will reverse. That the outcome of this current transition is confusing to retail investors, a reliable indicator, and is demonstrated by record Retail Money Funds.
The net/net is that Retail Money Funds and the 40%+ concentration of capital in high tech “recession proof stocks” indicate a high level of pessimism. As reindustrialization progresses all will have to shift to take advantage of the surging economic growth or miss out.
I remain confident in what I see for US markets.