2020 In With A Whimper, Out With A Bang – Equity Bulls Have High Hopes For 2021

From equity bulls’ perspective, the trend is in the right direction, except for two reasons. (1) Money is moving out of these funds but are yet to meaningfully find a home in stocks. Lipper data show that from the week ended March 25 last year through last Wednesday, US-based equity funds suffered outflows of $115 billion, even as taxable bond funds, investment-grade corporate funds and high-yield funds respectively attracted $200.1 billion, $146.6 billion and $51.1 billion, among others. And (2) the seven-month trend of falling money-market assets is decelerating, which is evident in Chart 2, which uses a four-week moving average.

Bulls would prefer these assets continue their downward momentum and that stocks eventually get their fair share.

They would also like to see the prevailing momentum in margin debt continue, if not accelerate. In November, FINRA margin debt jumped 9.5 percent, or $62.8 billion, month-over-month to $722.1 billion, eclipsing the prior record of $668.9 billion from May 2018 (Chart 3). To reiterate, the S&P 500 surged 10.8 percent in that month and another 3.7 percent in December. Last month’s data is not out yet, but it is possible margin debt rose to a new high as well.

Since last March, when stocks bottomed, there has been a material rise in investor willingness to take on leverage. Margin debt, too, bottomed in that month, at $479.3 billion, meaning it has gone up 50.7 percent over an eight-month period.

This is where it gets interesting. Going back to September 1997, there have been three other months when margin debt grew north of 50 percent over eight months (chart here) – June 2007 (up 52.6 percent), February 2000 (up 51.4 percent) and March 2000 (up 58.3 percent). Both 2000 and 2007 marked the onset of a bear market – in March and October, in that order. We just had another jump of over 50 percent. Bulls obviously put low odds on the possibility of a repeat of 2000 and 2007.

They would also not want foreigners to pull back their horns. Foreigners of late have been aggressively purchasing US equities. In the 12 months to last October, their net purchases equaled $262.8 billion – a record. November’s data will be out in less than two weeks, and given how US stocks fared in that month, in all probability they bought more.

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