Fund Managers Are Buying Stocks Again

There is a huge career risk in taking a position that is against the grain and being wrong for a few months if you are a fund manager. For example, going underweight tech stocks in the late 1990s would cause fund managers to underperform and be treated like pariahs by investors. 

Everyone wants to be in what is working at the moment. Sometimes if a manager doesn’t own a stock that has a good few months, he/she will buy the stock at the end of the quarter as window dressing. That is when a fund manager shows ownership of a winning stock even though he/she wasn’t smart enough to buy it before it rallied.

It could be worth it to take career risk, but only if the fund manager is extremely confident in the position. For example, if a manager is the first to discuss a company that is committing fraud, the manager will make money shorting the stock as well as gain adulation for bringing justice to an unethical situation. This discussion doesn’t mean being a fund manager is always a disadvantage. 

Sometimes it’s good to admit you were wrong and follow the trend. Some investors managing their own capital have stayed bearish for years. But they still invest because they can’t get fired from managing their own money. Professional money managers need to constantly review why they were wrong. It can be problematic to review long term positions every 5 minutes, but it makes sense to sometimes challenge closely held beliefs.

Investors who have been bearish since last year have been able to claim this isn’t a bull market because a record high hasn’t been reached. That’s obviously a mistake because they have been wrong for months. No one expects themselves or anyone else to perfectly time bottoms. However, don’t kid yourself that you have been right if you have been bearish all year.

Fund Managers - As the potential for the S&P 500 to reach a new high increases, fund managers have extreme pressure to go long the market. 

As the March Bank of America fund manager survey showed, most fund managers expected the global economy to slow. They had a high amount of cash and a low amount of equities.

This situation has changed in the April update as you can see from the chart below. The month to month change in fund manager positioning shows cash decreased over 13% and equities increased almost 15%. This explains why the market has increased so much in the past few weeks. 

That positioning in March was a bullish sign even though stocks had ramped in the few weeks leading up to that survey. The fact that managers are piling onto the bullish side is problematic for equities. It shouldn’t be a surprise though because you wouldn’t expect everyone to be bearish with the market within 1% of its record high.

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Fund Managers - Redbook Sales Growth Improves Again

This Redbook weekly same-store sales report may have been slightly helped by the late Easter. I don’t have any studies that show when people make purchases for Easter, but there probably was a significant increase in purchases in the week of April 13th as it was the week before Easter. 

The next report should have the biggest impact from Easter as the holiday is April 21st. Sales are up about 1% from last month and 5% yearly which is up from the previous growth of 4.8%. We will get the hard data update on March retail sales on Thursday. On a monthly basis the report will show strong growth because last month saw across the board weakness. 

That won’t tell the whole story. I will look closely at the yearly results to see the truth of how the consumer is doing.

Fund Managers - Housing Market Index Creeps Up Slightly

April housing market index was 63 which met expectations and increased 1 point from March. I expected this report to beat estimates, but at least it increased sequentially. Keep in mind, this is builder optimism, not consumer optimism. 

As you can see from the chart below, the index crashed at the end of last year and has slowly been improving this year.

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The current sales index was up 1 point to 69, but the 6-month expected sales index fell 1 point to 71. The traffic index increased 3 points to 47. Anything below 50 means a decline. However, it’s good to see traffic fell less in April. This weakness in traffic has been signaling the first time housing market isn’t strong because that’s where most of the traffic comes from. The decline in mortgage rates may have helped traffic fall less quickly.

Now let’s look at the housing market index by region. West was the strongest even though areas such as Seattle have seen declines in price growth. South was the 2nd best at 67. That’s important because the South is the biggest housing market. Midwest and the Northeast were at 53 and 51 which means every region had positive growth in April.

MBA mortgage applications index signals this spring selling season has been going well. Housing market index showed solid growth, but not as great results. March housing starts data will have a big impact on the real residential investment component of GDP growth. The result was strong in January and weak in February, so this report will be a tiebreaker.

Fund Managers - Conclusion

Fund managers are warming up to equities which shouldn’t be a surprise because stocks have been on a rampage. The market is probably going to run out of room to run higher soon as the bears have transitioned to bulls. First, it will need to reach a record high before it corrects or stagnates. 

The housing market is having a decent spring selling season. MBA applications index showed double-digit purchase application growth, while the homebuilder index is less positive, but significantly above the trough, it made at the end of 2018.