Wall Street Is Starting to Get Nervous About All the Money Pouring Into US Stocks
New York (Jan 8) After President-elect Donald Trump won the election, markets began a decisive shift in essentially all asset classes. Suddenly, everything from bank stocks to emerging-market bonds staged decisive price swings, driven by a stronger dollar, an increase in U.S. growth expectations, worries over the prospect of a more protectionist Trump-led administration and a steeper U.S. yield curve.
A big beneficiary of this dynamic has been U.S. equities, which have now seen nearly $70 billion in inflows since Nov. 8, according to Bank of America Merrill Lynch. Big losers have been emerging market equities and bonds, which have seen more than $10 billion in outflows
These positions are now vulnerable to a reversal, the firm adds.
"Traders [that are] looking to play a pullback on 'sell the inauguration' or 'here comes the Fed' or 'Chinese yuan-reversal' themes should note since the U.S. election the big inflows have been concentrated in U.S. stocks, financials, bank loans, U.S. value stocks, and High Yield," the team, led by Chief Investment Strategist Michael Hartnett write. "In contrast, Emerging Markets, U.S. growth stocks, Treasuries, Gold and Investment Grade have less vulnerability to profit-taking."
Bank of America isn't the first Wall Street name to issue caution. Morgan Stanley and Goldman Sachs Group Inc. sent out warning flags earlier this week, calling for U.S. equities to perform well in the first half of the year, but see a move lower thereafter.
"[W]hat incrementally positive and exciting outcomes could be produced in the first few weeks after [the inauguration]?" the Morgan Stanley team, led by Chief Equity Strategist Adam Parker, wrote this week, arguing that positive impacts from Trump's proposals, such as lower taxes and less regulation, have already been priced into the markets.
Goldman Sachs agreed, although at a slightly farther out date. "Later in 2017 we are looking to rotate from S&P 500 to emerging markets [EM] (specifically EM-ex-China) where risk appetite has lagged and we expect the growth picture to be more supportive," the Goldman Sachs team led by Ian right wrote. "As a result, we are Overweight the S&P 500 in our asset allocation over 3-months, but are Underweight over 12-months as we eventually expect fear to counteract growth optimism and higher rates to set in," he concluded.
Deutsche Bank AG equity strategists, led by Sebastian Raedler, draw attention to a number of technical and fundamental forces that suggest the developed-market equity rally may look "stretched." The first chart flashes the risks for U.S. stocks if economic data begin to disappoint after a decisive winning streak.
Source: Bloomberg
