JULY 2024
Could 2024 end up being a carbon copy of 2023 for markets?
Last year, many regional stock markets rallied strongly in the first quarter, then experienced a frustratingly long correction over the summer before surging during the final few months of the year.
So far in 2024, most headline indices are holding onto their impressive first half gains, but they have paused of late and another quiet summer potentially lies in store.
Investor sentiment and positioning will play a vital role in determining if another year-end rally will emerge.
The chart below shows the outputs of the American Association of Individual Investors (AAII) US Asset Allocation Survey. It is a monthly measure of how much is invested in stocks, bonds and cash in the average investor’s portfolio.
The dark blue line shows the average portfolio exposure in stocks was 70% in May, well above the two recent bear market lows (55% in March 2020 and 62% in October 2022) and now back up around a multi-decade high. Conversely, average cash and bond exposures have declined of late.
These surveys often send mixed signals and should not be relied upon in isolation, but the chart below is consistent with the general trend that investors have moved to a more risk-on stance over the past couple of years. That argues against the bull market continuing at its recent pace, but there is little on the horizon to suggest a sudden collapse in the average equity allocation.
The chart below adds weight to the argument that equity markets may take a breather over the summer.
The Chicago Board Options Exchange (CBOE) equity put/call ratio measures the trading volume of put options relative to call options.
A high ratio suggests investors are overly bearish and that equity markets are more likely to rise than fall, at least in the near-term. The converse is true when the ratio is at an extreme low.
In late June the ratio fell to 0.8, a 12 month low and consistent with the level it hit last summer when markets were entering into a mild “risk off” phase.
It’s important to note this metric typically has little bearing on longer-term market trends and, in general, the near 2-year bull market in equities looks set to continue, albeit after a likely period of digestion.
Each week, the American Association of Individual Investors (AAII) asks its members for their view on the stock market over the next six months.
If a respondent anticipates the market to rise they are classed as “bullish” and they are defined as “bearish” if they expect it to fall. They are deemed “neutral” if they expect little change.
The survey is far from perfect.
As we have noted before, how people say they feel about an economic or market event often contradicts how they are positioned. Another shortcoming of this particular metric is the fact it does not account for how much a respondent believes the market may rise or fall.
Regardless, by pooling the various replies it is possible to get a sense for overall investor sentiment, particularly if you net off the bulls and the bears, per the chart below.
A rising line suggests there are more bulls than bears (and vice versa) which, at face value, can be a reason for caution as it infers investors are already positioned for a stronger market.
However, scale is all-important and the net bullish reading is currently well below its prior peaks of the past ten years.
On a standalone basis, this indicator suggests the equity bull market is some way from over.
We first shared this chart in January, claiming “this is likely to be one of the most important charts to monitor over the coming weeks”.
That is because it shows the total amount held in US money market (cash) funds, so is a good proxy for investor risk appetite and positioning.
As we noted at the time, the balance has surged over the past couple of years, in tandem with the much higher rates now available on cash deposits and short-dated bonds.
Indeed, the total amount held in US money market funds now regularly exceeds U$6trn, more than double its pre-Covid norm and compared to just U$4.5trn a couple of years ago.
Why does this all matter?
These record high cash balances mean there is plenty of potential buying power sat ready to be deployed into equities and other risk assets if cash-heavy investors start to think they can earn a higher return elsewhere.
Major bear markets seldom start with investors holding so much cash and, at U$6.1trn, the money market balance is currently higher than when we first posted the chart at the start of the year.
However, there are tentative signs that it may have peaked so one to watch closely as we head into the second half of 2024.
The content of this document is for information purposes only. The authors believe that, at the time of publication the views expressed and opinions given are correct. No guarantee in performance of investment can be given to readers intending to take action based upon the content of this document. It is reminded that this document is a matter of opinion and any person wanting to invest in this market should first consult with the professional who can advise on their financial affairs. Any such investment will see your capital at risk, and you may get back less than you invest. Any companies cited in this report are used to support the view of the authors and should not be construed as recommendations to purchase or sell the underlying securities. Neither the publisher nor any of its subsidiaries or connected parties accepts responsibility of any direct or indirect or consequential loss suffered by a reader or any related person as a result of any action taken, or not taken in reliance upon the content of this document.
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